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With-profits whole of life.
This type of policy guarantees to pay the sum assured on the death of the life assured at any time.
The policyholder pays an extra premium to allow participation in the with profits fund, which works on a traditional with profits basis, in that the sum assured is increased annually by the addition of a bonus – called a reversionary bonus.
Once added the bonuses permanently increase the basic guaranteed sum assured payable on death.
A further final (or ‘terminal’) bonus will usually be paid on death, although this is not guaranteed, which can increase the size of the payout substantially, especially if a high level of (annual) reversionary bonus has already accumulated.
The surrender value is unlikely to be substantial in the early years of the policy and for the first two years at least it is likely to be nil.
Unit linked whole of life.
The ‘mix’ between life cover and investment is decided at the outset. Each monthly premium is used to buy units in a selected fund at an offer price.
Then every month the insurer calculates the cost of the life assurance for the next month only and deducts this charge by ‘cancelling’ just enough of the policyholder’s accumulated units to pay for the cover.
In this way, the policy grows in value as the number of units held in the policy accumulate and (hopefully) the value of each unit also increases.
The investment growth will depend on fund performance, how much is being deducted to pay for the life cover, and any other optional benefits selected (e.g. critical illness cover).
Initial charges are made to recoup the set-up cost of this type of policy. This is either done by a low allocation to investment units or special initial units are created.
The premium is usually reviewed on the 10th anniversary and may need to increase at that point (or the sum assured to reduce) depending on the level of unit growth.
Universal whole of life.
This is a unit linked whole of life with further options. As well as cancelling units to buy life cover they can be cancelled to buy:
permanent health
insurance;
critical illness
insurance;
personal accident
benefits;
hospital income
benefits.
The aim of the policy is to cover all the policyholder’s protection needs in one policy with the flexibility to move from protection to investment to suit changing needs.
Low cost whole of life.
A sum assured is payable on death at any time and is made up of two elements:
whole of life with profits (traditional)
decreasing term assurance.
The aim of the policy is to give maximum cover at minimum cost.
In designing the policy the actuary assumes a conservative with profits bonus rate, which may be added to the whole of life sum assured. The decreasing term assurance reduces at the same rate as the assumed bonus rate.
If actual bonuses are greater than assumed there should be a surplus on claim plus hopefully, a terminal bonus will be paid. If the bonus is less a shortfall can occur.
A surrender value is available. It may be low or non-existent in the early years because of the costs of setting up the contract and the fact that only part of the contract, the whole of life element, is an investment
policy. These products are no longer widely available.
Whole of life non profit.
A guaranteed sum assured is payable on death at any time. A surrender value is available, but it is likely to be low as there is no investment value.
Although a reasonable level of cover is provided at low cost there is no protection against the rate of inflation.
These products are no longer widely available.
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