Unit Linked vs With-Profits

[moomanoid]

Sorry, yet another GI person with a terrible grasp of unit-linked policies!

I think I understand how unit linked works but i cant see how it is fundamentally different to a withprofits contract (for whole life), especially when considering what customer needs are met. For example, when considering key features....

Premiums - Paid regularly, often reviewable
Charges - Taken from premiums or you are allocated units and charges taken from non-unit fund (makes no difference from PH point of view)
Risk - PH retains risk of poor investment performance in both cases, both often have a g'teed underpin. (altho maybe WithProfits bonuses are smoothed whereas Units are just Net Asset Value)
Surrender Value - Value of Units or approx 'Asset Share', both are similar concepts really! especially considering asset share is adjusted for expenses to make it more equivalent to a non-unit fund type thing.

In the pdf attached to the common queries sticky post, it mentions the savings element of a Unit Linked Contract, but if you have taken out a whole life policy your not really saving for a mortgage like with an endowment or something and you still get a payout like a with-profits policy.
Im sure im missing the point of one of the products somewhere so any advice would be much appreciated.
Cheers in advance

 

[Erik]

Hi there.

I've jotted down a few ideas. There are probably many more.

From a PH perspective the Unit-linked policy offers more choices. Often, a selection of funds can be chosen - ie. up to five funds. Therefore the policyholder has more freedom to structure his policy for his attitude to risk.

The UL policy transfers more investment risk to the PH. You're right - there might be an investment guarantee, but this is often just 0% return or otherwise very low. The with-profits policy is smoothed and even if the underlying investments perform very poorly, the co. will still have to give some bonuses to meet PRE.

The UL policy is supposed to be more transparrent, although this is probably debatable. Charges etc. are set out in the policy documents, so the PH knows exactly what his letting himself in for.

The UL policy is more capital efficient - I don't think the details is covered in CA1, but worth a mention.

The UL policy is less risky for the co. if they can vary their charges. Charges may be guaranteed for the first 2 years, say. If charges don't cover expenses then the company can review these charges. This is impossible for a WP policy.

It is much easier to alter a UL contract. It is much easier to change the sum assured on this contract than on WP. You just increase the mortality charge. This is much more complicated for WP. It is also easier to reduce the cover - you can even lose all the cover. The monthly premium can then be reduced or all of the premium can go into the unit-fund.

I think the first and last point is probably the most important - UL gives more flexibility.

I hope this helps - It was good practice for my ST2 exam.

 

[Erik]

Almost forgot the last point you mentioned.

You're right - a UL whole life policy doesn't make that much sense. It's also not that common.

The purpose of UL policy is to maximise expected return, so it's most suitable for endowment assurance policies.

Good luck for the exam.