Unit linked insurance policies

Life insurance savings and pension policies can be divided into two categories. With-profits and unit linked. These two categories are simply different ways of adding value to policyholders.

Savers in with-profits policies have the security of knowing that once bonuses have been added to their savings pot, they can't be taken away.

Unit linked policyholders know that if the investment performance of the insurer is poor, they could find the value of their 'units' - their investment falling in value. In unit linked policies, the policyholder's premiums are used to buy units in a fund run by the insurer.

The policyholder can usually choose from a range of investment funds covering a spread of investment markets but usually including a managed fund, an equities fund and a property fund.

Unit prices for life insurance funds change daily (in the same way that unit trust prices do). Both can be found quoted in the broadsheet newspapers including the Financial Times.

As with unit trusts, two prices are usually given. One is the offer price - at which the fund manager will sell units to you. And, there's the bid price - at which the fund manager will buy units from you. The differential between the two is typically between 5 and 7% - it's the way the fund manager makes his money! The value of the policyholder's units is directly linked to the value of the underlying assets and so will fluctuate.

Although the long term trend may be for the units to grow in value, on a day to day basis, the value of the units can fall. While unit linked insurance policies subject savers to a little more volatility than with profits policies, they do offer some advantages. e.g. if you decide to surrender your policy, you will know with certainty what you'll receive - it'll be the 'offer price'.

See Also: Moneyextra Insurance Service latest rates .

Last Updated: June 2006 © Moneyextra.com

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