Many offices have introduced unitised with-profits
funds. These are with-profits investments expressed as a unit-linked
policy. The main difference from the other unit-linked funds
is that the unit price is guaranteed not to fall. An advantage
is that clients find the bonus and pricing system easier to
understand, because bonuses are related to the accumulated
fund rather than the sum assured. From the life company’s
viewpoint, unitised with-profits policies are less capital
hungry than their counterparts, which adds to their appeal.
An element of the annual bonus may be guaranteed and there
may also be a terminal bonus on a claim by maturity or death.
There is a wide variety between the unitised with-profits
funds of the different life offices, but the aim is to express
the traditional with-profits investment as a unit-linked policy,
and most companies give the policyholder the chance to switch
between with-profits and true unit-linked funds.
However, most life offices reserve the right to apply a
market value adjustment factor (MVAF) to surrenders and switches
out of the with-profits fund. MVAF enables the life office
to reduce the surrender or switch value if it would otherwise
be in excess of the value of the underlying assets. The object
is to protect the interests of those staying in the funds
and maintain fairness between those who cash in early and
those who stay the full term. For this reason, MVAFs are not
applied to claims on death or maturity.
As unitised with-profits is a relatively new innovation,
past performance figures are still sometimes quoted for traditional
contracts, a point which investors and advisers should bear
in mind.