Unitised with-profit endowments were introduced to combine the security of the with-profits policy with the greater possible reward given by unit-linked funds. As with unit-linking, premiums are used to purchase units in a fund; and the benefits paid out on a claim depend on the number of units in the plan and the current price of the units at that time.

Under this type of profits plan, each premium or contribution paid in is used to purchase individual units at a typical cost of £1.00 per unit. The value of the plan is increased annually as a result of bonuses being paid, or contractual payments in some situations. Depending on the terms of the specific plan, a final bonus may also be due.

The difference between this and a standard unit-linked policy is that the unit prices increase by the addition of bonuses. Like the reversionary bonuses on a with-profit policy, these cannot be taken away once added, meaning that unit prices cannot fall, and the value of the policy, if it is held until death or maturity, is guaranteed. If the policy is surrendered (for example, cashed in before its maturity date) a deduction is made from the value of the units. This deduction is referred to as a market value adjustment (MVA) and the size of it depends on market conditions at the time of the surrender.

If the policyholder opts to move to another type of plan or withdraw completely at a non-contractual point or before the term ends, the value may decline or be reduced to ensure equality to other persons involved in the With Profits Sub Fund. Depending on the terms of the particular plan, the unit prices may exceed £1.00 to allow for certain fees, expenses or charges incurred or that are applicable to these plans. The guarantees attached can be valuable and difficult to replace. It is often advised that a person seeks financial guidance before making any changes to the plan – such as switching, withdrawing or surrendering the plan.

Types of premiums available

The following types of income protection premiums are currently available – ‘reviewable’, ‘renewable’ and ‘guaranteed’.

Reviewable premiums – a reviewable premium means that premiums may start off quite low, but will be reviewed over time and may go up every few years or so. In some cases, the premium may be reviewable once a year, or every five years, to take into account ever-changing circumstances.

Renewable premiums – renewable premiums are similar to reviewable premiums, but every time the policy is due for review or renewal, the premium is reviewed, and the amount paid to the insurer may change.

Guaranteed premiums – can be more expensive than the other two options, but the premiums are therefore guaranteed for the life of the policy, which can be as long as 25 years.

A premium option waiver may also be provided, whereby premiums for the IPI policy are not required while benefits are being paid from the policy, but the policy cover carries on as normal.