Life assurance based investment Flashcards
1 example each of more protection and more investment focused
endowment and single premium investment bond
how do bonuses with profits work (5)
Added annually based on investment profits
set at a rate that the insurance company’s actuary believes
represents the long-term returns from the funds.- smoothing
Paid on death or sometimes surrender
volatile and not guaranteed
can reduce on surrender via MVR
how does MVR work (4)
to protect investors staying in fund
to stop value leaving being greater than underlying
only applicable on surrender not death
In times of market turbulence
How do unitised with profit funds work (2)
Investors buy units which cant fall
Bonus - either get more units at same price or increase existing value
5 advantages of the unitised with profit approach versus conventional
*The bonus rate is declared annually in advance (but can be changed) V anually in arrears
- It is easier to understand the current value of the investment V not
- Switches can be made to and from other unit-linked funds, although an MVR may apply
- Unitised with-profit policies involve the insurance company in less initial commitment of reserves than traditional with-profit policies.
- A final bonus may also be paid on death or maturity, in addition to the value of the units.
how do conventual with profits work?
A conventional with-profit policy has an initial sum assured
increased by the addition of bonusses a percentage of the sum assured
5 advantages of with profits
- They provide investors who are relatively risk-averse with some exposure to the equity markets.
- Bonuses are not directly linked to investment performance in the same way as with unitlinked policies as can use reserves
- Over the long-term, with-profit policies generally outstrip inflation.
*
In some cases, they allow investors to participate in the profits of the insurance company’s trading activities. - represents ownership rights in the
life office itself. These should generate either additional profits or shares if the company is
demutualised.
3 disadvantages with profits
- they are difficult to understand and lack transparency;
- returns depend to some extent on the insurance company’s subjective judgment of longterm
returns - increase and decrease - they may be inflexible and generate poor returns on early surrender or during periods when the MVR applies.
7 considerations regarding closed wp funds
- the financial strength of the insurer;
- the current asset allocation of the fund;
- the current bonus rate;
- the long-term performance of the fund;
- the current surrender value of the policy;
- penalties (if any), i.e. an MVR, for exiting the fund; and
- the length of time until the end of the policy or an MVR-free encashment date.
Conventional with-profit endowment savings plan definition
life insurance policy that combines life cover with a savings element.
It pays out a lump sum either on the policyholder’s death or on reaching the endowment’s maturity date
How Conventional with-profit endowment savings plans work (6)
- Many policies have a ten-year term, which is the minimum for qualifying status.
- Level premiums are paid
- The premiums purchase a guaranteed sum assured, payable on maturity or earlier death.
- Bonuses are added to the guaranteed sum assured on the fund each year at the office’s declared rate.
- When the policy matures, or on earlier death, a final bonus is often added, based on % of the total annual bonuses already allocated (some insurers also on surrender).
- The eventual return is the total of the guaranteed sum assured, plus any annual bonuses
and final bonus
How do Low-cost endowment savings plans differ from conventional?
basic sum assured and bonuses on maturity
sum assured on death higher
What makes a life assurance policy qualifying
10 years or more
yearly or more
level premiums ish
75% or 75
what is a high income bond
high level of income, e.g. 10%, for five years, but do not guarantee return of capital.
Return of capital will depend on the performance of one stock market index
Provided the index meets a pre-set performance target over the period of the bond, capital is returned in full. If the target performance is not met, the payment at maturity will
be less than the original investment.
How does distribution bond differ from unit linked bond
distinguish between income and capital so that the income paid reflects the income generated by the fund
leaves the capital intact, although this could
still rise or fall in value.
The ABI classification requires that a distribution fund must have:
* a maximum of 60% total equity content (and a minimum of 20%);
* a minimum of 50% sterling-based assets; and
* a yield of, at least, 110% of the FTSE All-Share yield.
