Tell me about yeild on life insurance ?
Friday, November 14th, 2008If one fund has a yield of 8% before tax (and since life insurance companies pay tax on dividend income at the basic rate of income tax means there is over 5% to reinvest) and another has 3% (only 2% to reinvest) then the latter has got to produce 3% more capital growth every year just to keep pace with its rival - and this ignores the impact of capital gains tax. So a low-yielding fund may be a less promising choice for a unit-linked life policy than a high-yielding one. The latter, even if capital values remain static (as they do in most investment sectors some of the time), always has the reinvestment of income to help keep the value of units growing.
The second factor to be considered in purchasing unit linked insurance is the type of policy to choose. Like conventional policies, unit-linked ones are in the form of either endowments or whole-life policies. Many have the form of endowments or whole-life policies with the premium-paying period lasting till age 65 at most and for l0 years at least. As with the conventional policy, the ultimate intention for the accumulated capital should determine the choice. If “the intention is simply to accumulate a capital sum over l0 years with no necessity for continuing thereafter, then a simple l0-year endowment-type policy is best. The reason is that the flexibility of the longer-term policy (say, one based on the whole-life contract) also involves costs. If you are concerned with the conversion of capital to retirement income then the flexible format, as we shall see, has considerable advantages.
Unit-linked policies have become far more sophisticated in recent years because many people have taken advantage of them for investment while regarding the life insurance as no more than a by-product. The more costly investment directed contracts (”costly” meaning that a minimum premium of up to £50 a month may be required) therefore incorporate a number of investment and tax refinements. Such policies normally allow the investor to switch his investment between different funds.