UKSA education - Insurance Products

You're right. Nothing.
Insurance company investment products, particularly endowments, have taken such a beating recently that it seems unkind to kick them when they are down.

But........they are opaque, heavily marketed (and therefore costly), highly-commissioned, inflexible and out of your control. Or, to quote a recent article in 'Investors Chronicle': "......the sure-fire route to poor value and high charges comes with the combination of life-insurance and investment".

The industry's big claim is that it offers the benefit of smoothing investment returns. It's a mirage. We explain why in The Smoothing Illusion.

What are the products?
Basically, anything that is offered by an insurance company. Currently we include with-profit bonds, unit-linked bonds, insurance bonds, whole-of-life plans, maximum investment plans. No point in trying to list them all. As fast as one is rumbled they issue a new variant. (Annuities are a special case. If you want one you more or less have to go to an insurance company).

What about tax?
Unscrupulous advisers might imply that insurance funds are tax-free. They are not.

You pay no more (standard rate) tax on distributions from insurance funds. But that is because the funds themselves have already been taxed. This is in contrast to unit trusts and investment trusts which are not taxed. So you pay tax on distribution.

With-Profit Bonds
With-profit investment bonds (sometimes called single-premium investment bonds or distribution bonds) have their fans, because 5% may be distributed every year for 20 years tax free.

We've never understood why this matters. So, you get your own money back without it being taxed. Big deal! You get the same effect by putting your money under the mattress and spending 5% each year.

Advisers may tout these bonds as suitable for higher rate taxpayers who will fall out of the higher band when they retire. This is improbable. These savers are unlikely to be using their full annual CGT allowance. They should concentrate on doing so.

OK, tax is never that simple. But these bonds pay initial commissions of up to 9% and have opaque management fee structures. July 2005 research by Hargreaves Lansdown, reported in the Financial Times, has compared the value of identical funds either inside or outside an investment bond wrapper. Surprise, surprise, after 10 years the investment bonds were worth 20/25% less than their underlying funds.

Other things to watch
Some insurance companies have proved to be slow and/or inefficient in paying out when old insurance products are cashed in. This is particularly true if the products were originally marketed by other companies or under defunct brand names. Nothing you can do about it. You have no leverage.

Sometimes companies 'guarantee' that no exit penalties will be applied during the life of the fund. However they still apply a Market Value Adjuster (see The Smoothing Illusion). There is a word for this. It is called 'lying'.

If you find all this confusing.....
.....that's one of the things the industry relies on. But do not bother to learn. Just do not 'invest' in any insurance company product.

Isn't that a bit harsh?
No. The industry is a high-cost producer of poor financial products that relies on commission-driven sales and product opacity to exploit consumer ignorance.

The industry that brought you the endowment mis-selling and Equitable Life scandals is never going to restore the trust that is a pre-condition of your giving it consideration.