INVESTMENT-LINKED CONTRACTS

In the early 1960s the first unit-linked (or investment-linked) life assurance schemes started to appear, and since then they have grown spectacularly.

Investment-linked life assurance contracts are usually either 'single premium' contracts with no fixed term or 'annual premium' contracts for 10 years or more. Part of the premium or premiums is used to cover the insurer's charges and pay for life assurance cover (usually on a decreasing term basis). The balance is used to buy units either in a separate unit trust, or more usually, in investment funds run by the insurer.

Generally the insurer runs various investment funds each investing in a different type of investment, for example, UK or overseas shares, government securities or cash. It is now common for companies to offer 'unitised with profit' funds either in addition or instead of the traditional 'with profits' already mentioned. The policyholder can state what proportion of his money he wishes invested in each fund and may change these as investment conditions change. Alternatively, he can hand over the investment decisions to the insurer by participating in a 'managed fund' which invests in the other funds in proportions decided by the insurer.

The amounts payable either on death or when the policyholder wishes to end the contract depend on the underlying value of the units at the time of claim. If at the time of claim the value of the investments is high then the claim value may well be substantially more than would have been achieved with a conventional policy. Conversely if the value of the investments is low at the date of the claim then the claim value may be substantially less. However, in 'annual premium' contracts there is usually a minimum guaranteed death benefit to confirm with legislation relating to tax benefit. In 'single premium' contracts the amount payable on death will usually be calculated by multiplying the value of the investment by a factor which is dependant on the age of the policy holder at the date of death.

If a policyholder wishes to realise his investment he would normally receive the value of the total units purchased including any which were bought from the income of the units instead of being withdrawn in cash. As already stated, the amount will depend entirely on the value of the investments at the time.

Because of this degree of uncertainty, investment-linked life assurance should only be effected by someone of an investment risk by someone who is prepared to take something of an investment risk and has adequately covered his basic life assurance needs with conventional policies.

Most companies now have a range of investment-linked contracts which meet the needs of: