Higher Premiums

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Higher Premiums

Some policies operate on a yet different basis. Instead of making an annual charge the company keeps the income from the investments of the fund. In return, it allocates a higher proportion of the premium to units.

Thus it may say that it will invest 115% or 130% of your premium in units and keep all the income generated by the investments (if you are puzzled as to how the company can invest more than it takes from you each month, the answer is that it does not but it guarantees to pay you at maturity as if it had). There are two reasons why you should think very carefully before taking out a policy of this type.

One is that the lack of income to reinvest, as mentioned earlier, is a severe handicap to investment growth. The other is that the system creates a conflict of interest between the policyholder and the company. The policyholder wants the value of the units to grow while the company may be tempted to invest for maximum income, with damaging effects on investment growth.

This suggestion of careful consideration might with justification be extended to any unit-linked policy you are offered by a salesman who knocks on your door. Often, only one plan will be offered, and this may not always be good value for money.

From a qualified insurance broker you will almost certainly have the choice of several policies offering good value for money.

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Fund Charges

Skilful investment management may add 1-2% p.a. to the performance of a fund (which would be good going by historical standards).

Much of any such advantage could, however, be eaten up by extra fund charges, and so the level of charges embodied in any unit-linked contract deserves careful study. Unlike conventional offices, unit-linked offices display these charges for all to see, though their effect on the investment may be less easy to calculate than at first sight appears.

Charges are taken in three basic forms. First there is the deduction from the premium to service the cost... see: Fund Charges

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