10 - Life Assurance Products Flashcards
Life Assurance Products
What are the three basic types of life assurance product?
- Single Premium Bonds (aka investment bonds, onshore bonds)
- Regular Premium Policies (aka savings policies)
- Offshore Bonds
Life Assurance Products
What’s the difference between an investment bond and an investment fund?
The investment bond is the product you invest in (like an OEIC or an ETF).
The investment fund is the underlying fund that the money goes into and gets invested to achieve the return.
They are NOT two different products.
The premiums of life assurance products are split between which two aspects?
- Life assurance element
- Investment element
The higher the level of life assurance, the more of the premium is directed towards that and the lower the investment performance/return.
With Profits
Are these single payment or regular premium products?
With Profits can be single premium or regular premium
With Profits
What is the modern type of WP product that has replaced the traditional WP?
Unitised With Profits contracts
With Profits
What is the difference between the bonus calculations for traditional and unitised WP plans?
Bonuses for unitised plans are calculated in advance by actuaries projections of the long term future performance of the fund. This makes the investment much more transparent and is the main reason unitised plans are more popular and have replaced traditional plans.
With Profits
What is the return of the product based upon?
The return of the product is based on both the performance of the underlying fund investments AND the activites of the life assurance provider.
Note that the return is not DIRECTLY based on investment peformance (e.g. fund goes up 5% so you get a 5% bonus), but the actuaries estimates of future performance take into account the investment performance, so it does have an impact.
With Profits
What is the key benefit of WP funds compared to other investments, in terms of protection?
Unit prices of with profits funds are guaranteed not to go down.
With Profits
How do fixed price and variable price WP funds work?
The price of fixed price funds stays the same. Bonuses involve additional units being given to existing unit holders.
Variable price units on the other hand reflect bonuses by increasing the value of existing units.
With Profits
How does free asset ratio relate to WP investments?
The free asset ratio is an indication of the financial strength of the life assurance company. If this is not at a healthy level it indicates a risk that they will have issues maintaining the WP performance in the future.
With Profits
What is the MVR?
Any issues with it?
MVR is Market Value Reduction
This is a penalty applied to people exiting the fund to protect the people left in it.
There are “MVR free dates” when people can exit without paying an MVR, which is a potential issue for people left in the fund. Closed funds are likely to hold a lot of fixed interest (low risk) and the pot is getting smaller as people exit on MVR free days.
What is pound cost averaging and what investments does it relate to?
Pound cost averaging relates to regular premium investments (i.e. not lump sum investments).
It relates to the fact that you invest a little bit over time so your “start price” is spread out over the year. The idea is it reduces your risk of investing on one date that happens to be a high point.
With Profits
Two advantages to WP in terms of investment flexibility (vs collective investment funds)
- Switching between funds is very low cost
- All the usual funds available to OEICs (etc) are available in WP funds, but there are also guaranteed growth and guaranteed income funds, and property or mixed/managed funds
With Profits
Any return other than the regular annual bonuses?
There will be a terminal bonus on death/maturity.
If the product is life assurance focused the death bonus might be higher than the maturity bonus.
With Profits Savings Plans
What are they?
Restrictions?
Basically a WP investment with regular level investments.
Still get annual bonus, terminal bonus
Limited to £3,600 per year
With Profits Savings Plans
What are the features of low cost plans?
Low cost plans might have increasing premiums (so early premiums are cheap but have to get more expensive later to make up for it) or have lower terminal bonus than death bonus.
These aren’t very popular now.
With Profits
Early encashment issues
May be a surrender penalty.
Might be better off selling.
Unlikely to get your terminal bonus (unless very close to maturity).
With Profits Lump Sum Investments
What are they?
Just a WP invesment with a single lump sum investment instead of regular premiums (savings plans/endowments).
Usually written with whole of life cover.
With Profits
What are the typical charges
5% bid offer spread
1% AMC
With Profits
What are the 6 types of investment bond?
- Guaranteed Income
- High Income
- Guaranteed Growth
- Unit Linked
- Distribution
- Guaranteed/Protected Equity
With Profits
Features of:
- Guaranteed income bonds
- Guaranteed income bonds
- Up to 5 year maturity
- Income guaranteed and paid in arrears annually
- Capital returned at maturity
So they’re similar to fixed income/bonds.
With Profits
Features of:
- High income bonds
- High income bonds
- Give up the capital guarantee to achieve higher level of income
- Based on derivatives
- Capital only returned if stock index meets pre-set targets
With Profits
Features of:
- Guaranteed Growth bonds
- Guaranteed Growth bonds
- Capital guaranteed
- No income
- Various maturity dates and possibility to roll-over
With Profits
Features of:
- Unit Linked bonds
- Unit Linked bonds
- Income doesn’t get paid, rolled up and paid out at maturity as capital
- So better for high rate tax payers (CGT better than tax on income)
- Get 5% tax deferred withdrawals
- Can be encashed at any time