With-Profit Whole of Life Policy vs Unit Linked/Flexible Whole of Life Policy.
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Hi All,
Recently started studying R01, came across the following issues and skipped ahead but now I'm revisiting this section. I'm hoping someone can possibly clear up some confusion I'm having regarding the two whole of life policies in the title, and also the differences between the two.
I'm reading my study materials, and I've completed some further research online, but I'm struggling to get my head around the detailed workings of these protection types. It seems both types take a portion of the premium paid, and invest this portion elsewhere.
With the unit-linked policy, the invested portion is used to purchase units in a fund which I understand, but then I'm told "every month, the insurer calculates the cost of insurance for the forthcoming month and 'cancels' just enough of the accumulated units to pay for the cover". This is the part I can't get my head around; firstly I assume the term 'cancels' just means 'sells off' the units? Secondly, if I pay my premium on month 1, and a portion of this is used to purchase units, then surely the value of said units isn't going to increase so much within 1 month that I can sell some units in order to pay for my next months premium or even a significant portion of next months? Therefore, does the 'cancelling' only come into effect after a set number of years for example? Sorry if that's a bit of a ramble!
Regarding the With-Profit policy, if I'm right in my earlier assumption that this policy also takes a portion of the premium and invests it elsewhere, then where/what is this portion invested in? Is it also invested in funds? If so, what's the difference between this policy and unit-linked? I've read that the with-profit policy increases with the addition of bonuses; does this mean the provider invests the portion of premium, then takes the return from investment, and gives some back to the policy holder in the form of a bonus is this accurate?
I think I'm just struggling with the way the materials are worded, if anyone can provide a layman's explanation that would be great!
Thanks!