Chartered Institute of Stockbrokers (CISI) Professional Practice Exam

What advantage do with-profits whole-of-life policies have over unit-linked whole-of-life policies?

1. Lower premiums

2. Guaranteed payouts

3. Profits are locked in each year

4. No risk of loss

The correct answer is: Profits are locked in each year

With-profits whole-of-life policies offer a significant advantage in that profits are locked in each year. This means that as the policy matures, any bonuses declared by the insurance company are added to the policy's value and become guaranteed benefits for the policyholder. This locking mechanism provides a cushion against market volatility, as it helps to stabilize the policy’s value, even when there may be fluctuations in the underlying investments. In contrast, unit-linked whole-of-life policies are directly linked to the performance of specific investments. The value of the policy can fluctuate based on market performance, which means that there is a risk of not securing the same guaranteed benefits that with-profits policies provide. Clients in with-profits policies can have more predictable outcomes due to the locking in of profits, making them a potentially safer option for those who prefer stability over the risk and reward associated with unit-linked policies.