Hi On page 16 of the Acted notes in Ch 6, the price of a unit is discussed. - Unit price remains constant: addition of units, where the addition is made up of a guaranteed and bonus addition. - Unit price changes: increase is made up of a guaranteed part and a bonus part. Following this it then says that the bonus additions are akin to the regular bonus given under a CWP, and therefore these would be guaranteed? So what is the guaranteed part akin to? Why is there a distinction? Thank you, Rachael
Hi Rachael The difference between the two guarantees is a matter of timing. The guaranteed growth rate is guaranteed right at the start of the contract. whereas regular bonuses only become part of the guarantees when they are declared. A numerical example might help. A contract has a single premium of 100 and term of 3 years. If it was an accumulating with-profits policy it might have a guaranteed growth rate of 2% with the possibility of bonuses on top. So at the start of the contract the fund value is 100, but the policyholder is guaranteed to receive at least 100 * (1.02)^3 = 106.12. At the end of the first year the insurer must increase the fund by the guaranteed amount of 2% (to 102), but actually gives a bonus so that the fund value is 104 - the policyholder is now guaranteed to receive at least 104 * (1.02)^2 = 108.20. At the end of the second year the insurer must increase the fund by the guaranteed amount of 2% (to 104 * 1.02 = 106.08), but actually gives a bonus so that the fund value is 109 - the policyholder is now guaranteed to receive at least 109 * (1.02) = 111.18. At the end of the third year the insurer must increase the fund by the guaranteed amount of 2% (to 109 * 1.02 = 111.18). This time it gives no regular bonus (after all there is no guarantee that RB will be paid) so that the fund value is 111.18. The policy now matures and the insurer pays a terminal bonus to bring the total payout to 120. We can contrast this with a conventional with-profits policy. Again a premium of 100 is paid and in return the insurer guarantees the sum assured of 105. At the end of the first year a regular bonus of 1% is declared so the guarantee is now 105 * 1.01 = 106.05. At the end of the second year a regular bonus of 1.5% is declared so the guarantee is now 106.5 * 1.015 = 108.10. At the end of the third year a regular bonus of 1.2% is declared so the guarantee is now 108.10 * 1.012 = 109.40. The policy now matures and the insurer pays a terminal bonus to bring the total payout to 120. I hope the numerical example helps. Best wishes Mark
Hi Mark, Thank you this is really helpful. The point I was missing was the fact that the guaranteed growth rate was guaranteed at the start as part of the contract. Thank you, Rachael
