Unit linked life insurance polices

These polices started to be introduced in the late 1950’s and gave policyholders greater opportunity to link the life cover to the investment performance. The value of the policy is usually linked to either the value of units in a specialised fund run by the life office or to units in a unit trust. The value of the units varies with the fund values which may fluctuate daily.

All most all unit-linked policies operate on the same principal, in that part of the premium is used to provide life cover whilst the remainder is used to purchase units. Providing some form of investment. The future value for the policy is linked to the investment performance. How this is done and the individual terms of the policies vary from life office to life office.

Pricing structure of unit polices

Many offices operate two separate prices for a unit. The first if the offer price, this is the purchase price of the units. The cost of each unit when it is purchased by premium and added to the policy. The second price is the bid price, this is the selling price of the unit and is the price the policy holder will receive when the unit is sold or cashed in.

The bid price is usually lower than the offer price and a difference of 5% is common. This difference is known as the bid offer spread. This difference is in effect a cost or charge connected to the setting up and selling of the units. There is usually also a monthly management charge which is normally around one twelfth of one percent of the fund. This management charge is deducted before the prices of the units are calculated.

Funds often have two types of units. Initial units are commonly used for the early years of the policy and attract a higher monthly management fee. This allows the life office to recoup the initial setting up cost of the policy. The monthly management fee may be four times higher than the basic monthly fee and the bid offer spread may be higher. Then there are accumulation units purchased in the later years of the policy which attract only the basic monthly management fee and bid offer spread.

Another method for the life office to recover the setting up cost is for the policy to attract no units during the early years and for the premium to be used to pay for the life cover and setting up cost.

Some life offices now offer policies (usually single premium policies) with no bid offer spread but these policies usually contain heavy penalties if they are surrendered in the early years or before their maturity date.
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