What do I need to think about with a unit linked life insurance plan ?
In choosing a unit-linked life insurance cover it is necessary to look at two factors, the type of investment involved and the type of policy. Unit-linked funds invest in different types of assets. Policies may be linked to unit trusts which generally invest only in shares. There are many different unit trusts with different investment objectives. Some generate high yield, others low yield, some invest overseas, some only in the UK, some only in large companies and some only in small.
Policies are also linked to funds of mainly ordinary shares managed directly by the life office. Then there are ‘managed funds’ which divide their investments between properties, shares, fixed-interest securities and cash (a similar profile, in fact, to the conventional life office fund). Policies may also be linked to ‘property funds’ investing in commercial and industrial properties or to fixed-interest or gilt-edged funds investing either in a broad range of fixed-interest securities or in the narrower and most secure portion of that range represented by stocks issued by the Government.
As a general rule, the more restricted the scope of the investment fund concerning life insurance cover, the more risky it is likely to be. For example, a life insurance policy fund investing only in gilt-edged would suffer badly from the effects of inflation. Life insurance would then reflect very poor results if inflation continued at a high level over a 10-year period. A high rate of inflation might benefit shares, but investment in shares alone exposes one to the volatility of the stock market, which nowadays in the UK can involve a 50% change in prices in a year or less. The property market has on the whole been more stable, but can be imbalanced if there is crisis as was experienced in 1973.
The endowment borrower does have considerable flexibility (though this is, of course, largely dependent on the attitude of the building society advancing the money which will not always want to allow an extension of the loan period). Thus, unit linked life insurance can really help.
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