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What Is a Life Fund?

A life fund is a portfolio which can be made up of stocks, bonds, cash and alternatives, into which policyholder’s life assurance premiums are paid into and claims are paid out of

Emma Wall 19 June, 2014 | 6:00AM

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A life fund is a portfolio which can be made up of stocks, bonds, cash and alternatives, into which policyholder’s life assurance premiums are paid into and claims are paid out of.

Regular payments into an insurance policy purchase units in a life fund, much like a retail fund, and your policy value is directly linked to the value of the fund's underlying investments, which means there is typically no guarantee of the value of the claim when paid out. Some life funds are with profits policies, which pay out an annual bonus from the insurance company’s profits. This bonus is typically used to purchase more units. A guaranteed bond pays a fixed payment at a pre-agreed time, from investments held in a with-profits fund.

Life funds can only be purchased by pension providers and insurers, they are not available for sale directly to retail investors. Due to the scale of these funds, providers are able to access funds at a much lower price point than retail funds.

In 1997 the Association of British Insurers (ABI) introduced sectors as a system for the classification of life and pension funds so that consumers and financial advisers can compare them on a like-for-like basis. Every sector sets clear criteria that must be followed by funds wishing to belong to that sector. Unit-linked life and pension funds are split into a total of 34 ABI Sectors. The ABI sectors contain more than 8,000 life and pension investment funds, with more than £700 billion in assets under management.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Emma Wall

Emma Wall  is Web Editor for Morningstar.co.uk.