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1、or pay a lower expected level of premium for a given level ofbenefit.In addition, a unit-linked contract can offer flexibility in the level and type of cover included, and the ability to vary the level of premium according to need.28&$%Unit-linked contracts: example (1)A unit-linked whole life assur
2、ance contract is issued to a life of exact age 25.Premiums are payable monthly in advance. The initial amount of the monthly premium is 20, reviewable every 10 years.A range of unit-linked investment funds is offered including UK fixed-interest, UK equities, US equities and global equities (excludin
3、g US, Japan and Europe).Allocation rate of premiums to units are 25% for the first 18 months and 97% thereafter.Expenses of 2 per month are deducted from premiums before allocation to units. This amount is increased in line with increases in the RPI.An annual management charge of 1% of the unit fund
4、 is deducted annually.Three levels of sum assured are offered: maximum (200,000), standard (100,000) or minimum (50,000).The cost of life cover is met monthly by cancelling units.In addition, there is the option of for accelerating payment of the sum assured in the event of critical illness accelera
5、tion, also payable by cancelling units as required.In the event of surrender in the first 18 months, no benefit is payable. Thereafter, the value of the unit fund will be payable.29&$%Unit-linked contracts: example (2)How might you estimate the value of units to be cancelled each month to cover the
6、cost of life cover?Alternatively, the cost of life cover can be deducted directly from premiums before allocation to units.A key element of the flexibility in the above contract is the choice of the level of life cover.For the maximum level of life cover, the value of the unit fund atthe first premi
7、um review date is likely to be very low. In this case, the contract is largely for protection. Then, what is likely to happen to the monthly premium at the review date?However, with the minimum sum assured, the contract contains a much larger savings element (as the unit fund built up will be much h
8、igher).30&$%Unit-linked contracts: risks involved (1)The extent of any financial risks from investment, mortality and expenses will depend on the nature and level of any guarantees given and any constraints imposed on the level of charges levied (e.g. by marketing or legislative requirements).Commen
9、t on the extent of the investment risks faced by both the company and the policyholder in the above unit-linked contract.Comment on the extent of the mortality risk faced by the company in the above unit-linked contract.The insurance company also faces the risk that the explicit charges levied do no
10、t cover the actual expenses incurred.However, as in this case, it common for the insurance company to reserve the right to increase the charges levied at its own discretionand/or in line with inflation.31&$%Unit-linked contracts: risks involved (2)The anti-selection risk faced when writing unit-link
11、ed business is similar to that faced with the corresponding non-linked contract.In addition, it may be argued that the risk from selective withdrawal is higher as a result of the more open charging structure on unit-linked contracts (i.e. healthier lives may choose to withdraw from the contract if c
12、heaper life cover can be obtained elsewhere).As with all contracts, there is a financial risk from withdrawals when the asset share is negative. At all other times, the extent of the withdrawal risk depends on the how the level of the surrender value payable compares with the asset share.It is common to apply a surrender penalty such that the profit achieved on withdrawal approximates to that which would have been expected had the contract remained in force.32
