Life Insurance Guide | Insurance Help Product Information | Pricing Structure

Most funds operate on a dual-price structure – that is, each unit has two prices, the offer price and the bid price.

The offer price is the price the office uses to allocate units to a policy when premiums are paid. If the offer price is £1 and the whole of a £100 premium is to be applied to buy units, it will buy 100 units.

The bid price is the price the office will give for the units if the policyholder wishes to cash in or claim under the policy. This is always lower than the offer price. 100 units can be cashed in for £95 if the bid price is £0.95.

There is commonly around a 5% difference between offer and bid prices. This is know as the bid-offer gap or spread, and is in effect a charge made by the life office to cover its expenses in setting up the policy. There is also usually an annual management charge, typically 0.75% - 1%, which is deducted from the fund monthly before the prices of the units are calculated.

Some offices now offer products (particularly single premium ones) with no bid-offer gap, but with penalties for early surrender to recoup the heavy expenses incurred in the early years of the contract. Such policies often also levy a ‘set-up’ charge of around 1% per year for an initial period of five years. These products may prove more beneficial to clients who continue their policies their policies to the expected maturity or expiry date.

There may often be two types of units in any given fund; initial units and accumulation units. Initial units have a higher monthly management charge (say a third of 1%) than accumulation units (say one-twelfth of 1%). Initial unit prices are thus lower than accumulation unit prices. Initial units are used for the early years of regular premium unit-linked policies, where heavy initial expenses need to be recouped. As with the bid offer gap, the initial/accumulation unit structure is, in reality, a form of charge imposed by the office. Initial units have become much less common in recent years.

Another form of charge is the non-allocation period. This is a period during which premiums do not purchase units, eg, the first year of a whole life policy.

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