Unit Linked Q4.7

Hello

We’ve got a regular premium UL policy here. Cashflows in to the unit fund each month will be the £20 per month premium, and the unit fund will be increasing with investment returns. However, the charges are being deducted from the unit fund, causing it to decrease; in particular:

• 1%pa of the value of the units
• a monetary charge amount which starts at £2 per month, but increases in line with inflation
• charges for the death benefits : q / 12 x(SA – unit fund).

We know that if a policyholder has chosen the maximum SA, and especially if they’re older so that the q factor is higher, than the charge for the death benefits might take up the majority of the £20, and so the unit fund might only be expected to be quite small throughout the period between premium reviews.

It might become negative if either it doesn’t grow as much as expected (ie investment returns are low) or the charges are more than expected (eg inflation is high, inflating the £2 per month more). The charge for the death benefits, with its dependence on (SA – unit fund) , will also be higher if the unit fund is low.

Implication of this is that the company isn’t charging enough & will need to increase premiums at the next review date.

Best wishes
Lynn