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Investment life insurance polices

These are life polices where there is a build up of surrender value. These are split into two type, whole life and endowment.   In the event of whole life policy a pay out will be attained when death occurs. With endowment polices a payment will be attained either on death or maturity of the policy, which ever occurs first.

Both the above policy types may be for a guaranteed sum only, in which case they are know as non-profit.   Alternatively the return (sum insured) can be linked to the life offices investment performance. This can be by way of ‘with profit’ policies where the performance is linked indirectly to the life office investment performance and how the life office insurance fund does compared to death payments. The alternative way is for the policies to be unit linked with payout directly related to the investment performance of the units.

With profit life insurance policies

The life office is obliged to carry out a valuation of the amounts held in its life offices fund and to compare this to the liabilities under the life polices it still has running. This will normally reveal a surplus and a proportion of this surplus can be released to policy holders as an addition to their sum insured.   These are called reversionary bonuses and are payable only when the sum insured becomes payable. This bonus will however increase the surrender value.   Most life offices will allow the bonuses to be released as a cash value, but this cash value will be much lower than the reversionary value.

Bonus systems vary between each life office but there is one large difference between a normal bonus and a terminal bonus.

A normal bonus is declared every year and increases the value of the policy year by year as it gets older. It is common practice to show this bonus as a percentage of the sum insured.   This may be simple or compound. Once allocated normal bonuses can not be removed.

A terminal bonuses is added only when the life policy becomes a claim an so therefore is not included if the policy is surrendered. Again it is often expressed as a percentage. Many life offices use both the normal bonus and the terminal bonus system.

A pay out on the death of the life insured may therefore comprise the following three elements.
  1. Sum insured (is guaranteed at the outset,
  2. Normal bonus,
  3. Terminal bonus.
Because of the bonus system premiums for with profit policies are always higher than the corresponding non profit policy.   Indirectly under a with profits policy the policy holder benefits from the investment performance of the life fund because if the investment performance out performs expectations, then the fund may be higher than required to meet liabilities.

Bonus calculations take in many factors and are at the discretion of the life office’s directors who have to be comfortable that the company can meets its liabilities.

Many life offices are now moving towards unit linked life insurance as described below.
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