Information Life Cover

If interest rates rise during a particular period, then the capital value of the investments held will fall. Since they are usually dated investments such a temporary fall in value affects neither the generation of income nor the ability to produce the guaranteed maturity value. But it does prevent the company being able to guarantee a proportionate return to the policyholder who wishes to surrender early (it was unrealistic early surrender values on income bonds that led to the failure of two small insurance companies in 1974).

Thus, a rise in interest rates, which may encourage investors in such contracts to surrender, is also bound to reduce the amount the company can offer them. For this reason, it is worth taking a careful look at the recent trend in interest rates before committing yourself to an income bond, especially a longer-term one. If interest rates appear to be on a rising trend, then it is well worth while waiting to take out a contract as higher interest rates will fairly quickly be reflected in the rates companies are offering. On the other hand, when interest rates start on a downward trend, as in late 1976 and early 1977, the rates offered can fall quite quickly also.

Another variant of the growth or income bond is the combination of a temporary annuity and a with-profit endowment policy. These are not, strictly speaking, either single premium or guaranteed policies. The down payment of the lump sum buys a temporary annuity and the first premium on the endowment policy. Subsequent premiums are paid out of the annuity, and they are eligible for tax relief in the normal way (this means that the minimum period of these contracts has to be four years to avoid the clawback. The lack of guarantee arises because the maturity value quoted for the with-profit endowment depends on the continuance of the company’s current rate of bonus, and this itself is not guaranteed. However, such contracts can produce an attractive return so long as the investor is able to claim the tax relief.

The differences between the results of cashing-in on a life insurance policy in any year are affected both by the market trend and fluctuations and by investment management decisions. The same 10-year £10-a-month policy linked to a unit trust could have produced £2,100 in 1973, but only £1,100 in late 1974 (and £1,800 in 1976). In anyone of those years the range between the maturity results of different unit-linked life insurance policies was even larger than that between the best and worst with-profit endowments over the same period. Part of this disparity is due to the different invest­ment aims of the different funds to which policies were linked and part to the relative abilities of their investment managers.

The fact that in 1976 a maturing policy linked to a unit trust which limited itself to investing in shares of investment trusts produced a far lower maturity value than one investing in high-yielding shares can be explained by the fact that over the latter five years of the policy period investment trusts shares rose in value at a far lower rate than the average for all shares. There was nothing the investment managers could do to alter that. On the other hand, the fact that two policies maturing in 1976, both linked to funds aimed at generating a high income, produced values different by 15% cannot be explained in this way, and the conclusion must be that one team of investment managers was more skilful than the other.

The phrase “rose in value” is itself a little misleading, and it is worth making a brief digression from investment management to explain it. The point is that it is not necessary for the level of investment prices (or, as we shall say, unit prices, as these reflect market prices) to be higher at maturity than at the start of the policy period for the investor to make a useful profit. What determines the amount of the gain is the relationship between the average price paid for units and the actual unit price on encashment.

The chances that if you have come across life insurance in anything other than circulars and newspapers advertisements, it will have been through call from a salesman employed either by a life insurance company or an insurance broker. Some recent surveys have helped to suggest that more than half the people who have investments-oriented policies including little life insurance believe they had bought protection for their families.

People often give way to the apparent moral force of the salesman’s message, which is founded on the premise that life insurance is a good thing to have. Eloquently extolling the virtues of keeping the widow from the poorhouse and the children out of rags, the unscrupulous salesman may be successful in selling a life package which includes minimal protection and an unwanted investment-oriented policy.

Life insurance can make a positive payment to the quality of life to the amount that it reduces the risk of lack of money (and the anxiety associated with this opportunity) and increase the possibility of independence. If it is genuinely to make such a contribution, the would be purchaser must have knowledge of something about the life insurance he is going to buy. You must know what you want or need from life insurance so that you can satisfy such need at the most excellent possible fee.

Life insurance is an essential factor of a sound monetary plan. Life insurance can keep you out of monetary difficulties. If you are not already working with an insurance qualified person, you may possibly want to think about the advice of a fee-for-service monetary planner who can propose you an objective analysis of your insurance decisions. When you make a decision on what you want to do, buy a life insurance or not, there are many life insurance companies to choose from. You are able to consult your library or an independent insurance qualified to your needs and may inform you of what type of life insurance you will need and the decision is yours if you want to buy life insurance.