Life Insurance Quote Reviews

As with life insurance proper, the different experience of all individuals is encompassed within the mortality statistics. While in ordinary life insurance “the burdens of the few are borne by the many”, in annuities almost the opposite is the case, for it is the losses of the few (the minority who die soon after taking out their annuities) that provide for the propensity of many annuitants to live longer than the average.

The investments in which the company invests its annuity fund are often Government securities or other fixed interest investments such as local authority loans. The reason these are normally chosen is that they enable the company to obtain the highest possible secure income on its annuitants’ money and also to match the income to the expected periods for which it is to be paid.

Annuities used to be a favoured investment for retired people who had saved up money throughout their working life and wanted to obtain an income from it higher than that available from deposits or stock market or other risky investments.

The return from the annuity is higher because of two factors: first, each annual payment consists of an element of both interest and capital, and, secondly, the yield from the underlying investments is usually the highest income safely obtainable on any invest­ment. Only the interest portion of each annual payment is taxable, so that the net annual return from an annuity will far exceed that obtainable, say, on equities.

However, the steady increase in inflation since 1960 has had a very severe impact on those who purchased annuities on retirement at the start of that decade. The fixed annual payment of annuitants has been eroded in spending-power terms and in some cases hardship has resulted. The dangers of contracting for a fixed income in inflationary times should not be forgotten when considering an annuity, but it may still provide the best net return when compared with other types of investment. There are several different types of annuity matched to particular needs which are considered below.

If 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.

In the conventional bonus systems we have been looking that the sum assured plays the central role in surplus distribution, which is achieved by additions to the sum assured. Since this sum is payable on maturity or earlier death, this does place certain investment constraints on the company, that always keep a watchful eye on mortality statistics and expenses at the same time as managing its investments. A number of people discovered that it was possible to detach investment from the protection inherent in the conventional with-profit policy through the use of unit linking.

A specific proportion of the premium (usually low) was earmarked to provide some life insurance cover, and the rest was invested in “units” in a fund or funds selected by the policyholder. At first, these were restricted to authorized unit trusts investing in the stock market, but later internal unitized funds of ordinary shares, property, fixed interest, etc.

While a minimum guaranteed life insurance is maintained throughout the policy’s life, it does not normally grow as cover does under a conventional with-profit policy. But the value of the investments, mirrored in the price of the units, will always provide a sum reflecting exactly the investment experience of the chosen fund. The policyholder in this situation does not need the calculations of the actuary to decide how the surplus is to be distributed because it happens automatically.

 At maturity, he simply receives the net value of all the units that his premiums have purchased over the years or the units themselves. Since this sum will relate very closely to the level of market values, whatever type of fund is involved, the policyholder is exposing himself to certain investment risks. Whereas the conventional system takes on the investment risk and spreads it over large numbers of policyholders and also over time, the unit-linked policy requires the policyholder to shoulder the investment risk himself, without the safeguards of the conventional company’s “smoothing operations”. But it is hence worth emphasizing again the difference in cost between pure protective life insurance and investment-oriented policies