Switching Investments

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Switching Investments

Unit-linked policies have become far more sophisticated in recent years because many people have taken advantage of them for investment while regarding the life insurance as no more than a by-product. The more costly investment-directed contracts ("costly" meaning that a minimum premium of up to £150 a month may be required) therefore incorporate a number of investment and tax refinements. Such policies normally allow the investor to switch his investment between different funds. A company may, for example, have five funds (equity, property, fixed-interest securities, cash, managed) and allow the investor to switch his premiums from one to another on an annual basis. He may also, for a modest fee (around 1% of the value transferred), switch the units accumulated in any fund to any other fund when he wants to. So such policies offer the investor the opportunity to build a "do-it-yourself" portfolio of investments within the life insurance policy.

This is an appealing concept, but it must be used to make it worth while. There is no point in taking out such a policy and starting it with premiums directed to a gilts fund, because you think that is the one with the best current prospects, unless you are prepared to review that decision and if necessary switch the units when conditions change.

The tax refinements of these policies are concerned with the drawing of the ultimate benefits. So long as premiums have been paid for 10 years the policy is a qualifying one and the proceeds are free of tax. But the investor who has accumulated this capital does not really want to cash it in, reinvest the proceeds and end up paying tax on the income. Ideally he wants to draw off part of the policy proceeds each year without any tax liability. Ways of doing this have been devised, and normally involve continuing the payment of premiums to the company at either a reduced (half the original) or nominal (£15 p.a.) level in order to maintain the policy in force. So long as this is done it is possible to draw off a proportion of the benefits each year free of tax as an income, while the accumulated capital continues to grow in the funds chosen.

Contracts of this type have a variety of names but usually involve a 10-year premium payment period with the option to continue for a second and third 10-year stint; "income" may be drawn by one of the conversions mentioned above after a minimum of 10 years.

Interested in Switching Investments?

Unit-linked Insurance Tips

In general, therefore, the type of fund best suited for those with limited resources and no wish to take unnecessary risks is the managed fund. Here, the managers will aim to adjust the proportions of the fund invested in the three main sectors (property, shares, fixed-interest securities) to minimise losses in falling markets and maximise gains in rising ones. Over any short period, through this spreading of assets, they are likely to do less well than at least one of the three sectors might do individually, but over a longer period this should be outweighed by the ability to mitigate the poor performance... see: Unit-linked Insurance Tips

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