|What has Insurance got to do with
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.
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
The industry's big claim is that it offers the benefit
of smoothing investment returns. It's a mirage. We
explain why in The
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.
You pay much the same total tax in both cases.
More at Tax
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
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
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
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.