Chartered Institute of Stockbrokers (CISI) Professional Practice Exam

What is the advantage of a with-profits whole-of-life policy over a unit-linked whole-of-life policy?

1. Lower premiums

2. Profits are locked in each year

3. No requirement for investment choices

4. Guaranteed payout regardless of performance

The correct answer is: Profits are locked in each year

The advantage of a with-profits whole-of-life policy lies in the way it handles profits and ensures guaranteed benefits over time. In such a policy, the insurer accumulates profits generated from investments and other sources, which are then added to the policy's value. The critical feature of this type of policy is that profits are locked in each year, meaning that as the policyholder continues to hold the policy, the value of the benefits increases in a stable manner, offering a sense of security and growth. This characteristic contrasts sharply with a unit-linked whole-of-life policy, wherein the policy's value fluctuates based on the performance of the selected investment funds. Consequently, the potential for annual returns is not as reliably secure since it depends heavily on market conditions. The locking in of profits in with-profits policies provides policyholders with a more predictable outcome, especially beneficial for long-term financial planning. While other options may seem advantageous in certain contexts, they do not encapsulate the core benefit of stability and gradual growth that locking in profits each year provides. Thus, this feature sets with-profits policies apart from their unit-linked counterparts.