Hi, I had a doubt in the question below. A life company has written unit linked single premium bonds for a number of years and is expanding into unitized with profit bond market. Regular bonus can be added which can be zero but not negative. i) Discuss alternative approach for applying regular bonus to unitized with profits bonds. This is a October 2010 question. I wanted to know the solution of the question above as I was not able to find out from which part of the syllabus was this question tested while looking at the solution. Also I would like to have more clarity on unit linked single premium bonds. Would appreciate if anyone can help me on my questions above. Thanks, Abhishek.
Hi Abhishek The different ways to add regular bonus to unitised with-profits policies are described in Chapter 6 at the top of page 16. The Core Reading says: "There are two basic ways in which the unit part of the contract could operate: · The price of a unit remains constant. The company allocates additional units to each contract, usually annually at the bonus declaration. These are made up of a guaranteed addition, which could be zero, and a ‘bonus’ addition which could also be zero, especially if there are guaranteed additions. The number of bonus units is determined at the discretion of the company. · The price of a unit changes. The company, instead of allocating additional units, changes the price of a unit, usually on a daily basis. The increase is made up of a guaranteed part (possibly zero) and a bonus part." Single premium bonds are a type of savings contract. However, the name of the contract is misleading as often the investments backing these products are equities rather than bonds. A typical contract might involve the policyholder paying a single premium which they can then invest in a range of different unit funds. The policyholder will then receive the unit value at maturity which may be after 10 years. Best wishes Mark
