Life insurance companies offer savings products linked to life insurance. Part of your investment is used to buy life insurance, leaving the remainder for investment. Insurance cover (and hence added security) may be provided at the cost of reduced expected investment returns.
Insurance-Linked Savings products are suited for long term investment and often have minimum investment periods and penalties for early withdrawal. There are three main types of insurance-linked savings product:
Purchased Annuities are lump sum investments paid to secure a lifelong income stream. They are most often seen when investing lump sums arising out of pensions at retirement to provide for income during retirement. For more information about this product and a list of providers, visit the 'Annuities' page.
Endowment Policies are fixed term investments that pay out at the end of the term (the 'maturity date') or if death occurs earlier. They provide for a minimum sum (the 'guaranteed death benefit') payable if death occurs before maturity. The amount payable on maturity will depend upon the investment returns. Providers aim for the investment to grow to an amount in excess of the guaranteed death benefit before the policy's maturity date but there is no guarantee.
Whole of Life are policies without a fixed maturity date. They pay a capital sum if death occurs during the life of the policy and a capital value accumulates that can be cashed on policy surrender.
The 2 most common types of investments provided within Whole of Life and Endowment Policies are:
With Profits - Here you share in the insurance provider's profits. Annual bonuses are allocated to your policy related to the profits made by your provider. As the provider's profit is not assured, the bonus cannot be guaranteed. However, providers typically declare a 'bonus' or 'reversionary bonus', usually on an annual basis, that can not be taken away from you once declared. Policies with higher reversionary bonuses will have lower expected returns but will be comparatively safe investments. The return on the investment premium depends on the bonuses allocated over the term of the policy.
Unit-Linked - These tend to carry a minimum of life cover with the largest part of the premiums invested in vehicles which operate in a similar way to unit trusts. Investment returns are closely related to the performance of the linked vehicles.
Whole of Life and Endowment Policies are usually available in 2 forms:
Regular Savings Policies are most commonly seen as regular savings plans attached to mortgages. Regular savings are invested in the insurance provider's 'With Profits' or 'Unit-Linked' funds. If you die within the term, the guaranteed minimum death benefit pays out. You can use this to pay off your mortgage. However, at maturity the sum paid out depends on the performance of the With Profits or Unit-Linked funds. This may or may not be enough to repay your mortgage. Regular Endowment Policies offer a convenient and disciplined means to save while having some element of life protection cover. The regular payments make administration simple.
Bonds or Single Premium Policies are savings plans with, typically, only a small element of life insurance and premiums invested to provide investment returns. You can choose to receive an income over the term ("Income Bond") or re-invest for growth ("Growth Bond") or a mix of the two. At maturity or surrender, you receive a return of capital which, depending on investment performance, may be greater or lesser than the original sum invested. There are variations that offer guaranteed levels of income and/or capital at maturity.
Points to Watch: Regular premium endowment policies are long-term savings plans. Look carefully at your commitments to pay into the plan and your flexibility to cease to make payments in times of difficulty.
Early cancellation of a policy may mean that you will receive less back from your investment than you have put in, especially in the early years.
You should review the funds' performance annually to take early action if performance is below par.
Tips: Obtain several quotes and compare terms. Review the providers' bonus records and the performance of their investment funds after deductions for charges. Select a provider with consistent bonus and investment track records and a sound market reputation.
It is possible to "unbundle" an endowment policy into its insurance and investment components. Unless you have specific reasons to combine them, you can purchase life insurance and separately invest your savings in investment products provided by specialist investment providers, including insurance providers. This may afford you a greater degree of flexibility to select products to suit your circumstances as they change.
Tax Tip: For funds that accumulate capital growth, insurance based products are likely to be less advantageous than Authorised Unit Trusts ("AUT's") and Authorised Investment Trusts ("AIT's") as tax on gains made by insurance companies is paid earlier.
Insurance-Linked Savings products are complex. If in doubt, click below to speak to an Independent Financial Advisor free of charge.
General
AUT's, AIT's and OEIC's
Insurance-Linked Savings
Choosing a Fund
