Think of unit linking like buying shares. Instead of buying shares in a company on the stockmarket, you buy shares in a collective investment plan.
Premiums or lump sums that you pay into an investment, life insurance fund or pension fund buy units in the fund of your choice and are given a price or value. Every time you pay a premium or invest a lump sum you buy more units.
Value of my investment: Unit prices
This value can fluctuate on a daily basis, depending on how much the underlying assets in the fund are worth. If 1,000 shares or units have been issued and the value of the assets owned by the fund is £2,000 then the unit price is £2.
The value of your policy at any given time is the number of units you hold, multiplied by the current price of those units.
As the assets owned by the collective fund rise or fall, so does your unit price or share price.
Life Insurance and Unit Linking
Some life insurance policies are unit linked, particularly flexible whole of life plans. The cost of the life cover is paid for by the units being encashed. This is why some life policies have a residual cash value.
Types of Fund Available
Investing in unit linked funds usually gives you a wide choice of where you would like your money invested.
For example, many life assurance companies offer funds ranging from cash based to international, property, ethical, specific country and managed funds. Managed funds tend to have a mix of investment sectors within them which tends to spread out the risk of large fluctuations by diversifying where money is invested. If you want to change your fund choice, most companies allow you one free switch each year. This means that if you want to move from one fund to another for whatever reason, you can.
It is possible to take out savings plans or invest lump sums into unit linked funds operated by life assurance companies, pension companies, offshore companies, units trust firms, investment trust companies, oeics, reits and many more.