Page 160 - DCOM205_ACCOUNTING_FOR_COMPANIES_II
P. 160
Unit 8: Accounting for Insurance Companies
which is often partly guaranteed (they are typically subject to market value adjusters, so that notes
the return is reduced if the investment return obtained by the life company is not sufficient to
support the guarantee) or may be paid as income through the period of the policy. As investments,
these products will be in direct competition with other forms of medium term deposits, such as
building society deposits or unit trusts.
Unit Linked Policies: With a unit-linked policy the policyholder buys units in a pooled investment
fund and therefore participates directly in the investment performance of the underlying funds.
The return arising from a unit linked policy is determined by reference to the value of a particular
fund of investments. The performance of the contract is objectively linked to the investment
performance of the fund investments rather than being at the discretion of the insurer and thus
the investment risk is passed on to the policyholder.
A unit linked policy differs from a conventional policy in that:
l z A guaranteed percentage of each premium is allocated to units in the life fund.
l z The capital growth, and frequently the income of the fund, is re-invested in the fund, and
is reflected in the increased value of the units. The policyholder benefits directly from the
total investment growth and income.
l z The basis of the charges by the life company is normally fixed at the outset of any
policy. Companies that write only unit linked policies tend to be subsidiaries of banks
(‘bancassurers’).
8.1.5 annuities
An annuity policy provides for payments to be made at regular intervals, starting at a specified
date, and usually continuing until the death of the policyholder. The amount of the payment is
specified by the policy, and may be constant throughout the annuity period, or may increase at
a prescribed rate.
8.1.6 pensions
Pension policies involve paying regular or single premiums to create a stream of income (starting
at retirement), usually also with the option of paying a capital sum. In essence, these policies are
savings contracts, leading to a deferred annuity and a capital payment.
Example: The premiums paid and the investment incomes generated are tax deductible
and exempt from tax respectively.
8.1.7 permanent Health insurance (pHi)
A permanent health policy provides for income to be paid in the event of the insured falling ill.
The sum paid depends on the particular contract, and may be either fixed or escalating, and for
a limited period or paid indefinitely.
8.1.8 premiums
A premium is a sum paid to the life office to assure the benefit specified by the policy.
Payment of premiums: Single premium contracts: These contracts require the payment of a single
amount by the policyholder at the start of the contract term.
Regular premium contracts: The policyholder is contractually obliged to make payments at
regular periods to the insurer over the term of the policy, e.g. monthly, annually.
lovely professional university 155
