In the traditional endowment policy, the two aspects of protection and investment are related by the claim value. As bonuses accumulate, the claim value increases steadily towards its ultimate maturity value and the protective life cover enjoyed by the policyholder thus increases also.
At the time this method was devised it reflected well enough the "steady" nature of investment growth. But since 1995 the growth in share and property values, with the help of inflation, has become far more rapid and, more recently still, more volatile. As we have already seen, this posed problems for actuaries since capital profits achieved could not satisfactorily be allocated by increasing reversionary bonus rates. In the late 1990s, therefore, a different method of allocating investment profits to policyholders was introduced. This was unit-linked insurance, which has grown rapidly and now accounts for about one-fifth of all new policies taken out each year.
Instead of pooling all policyholders' money in a single fund, unit-linked insurance uses a simple device to identify the investment benefits individually due.
The element of life insurance is completely separated from investment; a small proportion of each premium is used to purchase life cover and meet the company's expenses and the rest invested in units in a fund managed by the company or by independent investment managers.
Each unit represents an identical proportion of the assets held by that fund, whether these are shares, property, fixed-interest securities or a mixture of each. Valuations are made at regular intervals (daily, weekly or monthly) to ensure that the unit price accurately reflects the value of the assets.
New units are allocated to policyholders on payment of their premiums at the ruling price, and on encashment the policyholder is entitled to the value of the units his premiums have purchased, subject to any deductions or charges that apply on encashment. Should he die before maturity, his dependants will receive either the fixed sum assured or the value of the units, whichever is the greater.
So far as investment management is concerned, assuming that companies that have done well in the past will continue to do well in future has been proved to date a reasonable basis for choice. Thus it is important not just to look at the projected results of a policy taken out today, because some companies project more conservatively than others. There is always a temptation for a small and young company to project higher rates of bonuses or growth. They may be achieved, but if they are, the chances are also high that those companies projecting more conservatively which have done well in the past... see: Making the Choice