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.

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This entry was posted on Friday, November 21st, 2008 at 12:04 pm and is filed under Life Cover. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.