Which statement correctly describes a major difference between unit-linked endowments and with-profits endowments?

Which statement correctly describes a major difference between unit-linked endowments and with-profits endowments?

• A. the maturity value is guaranteed for a low-cost with-profits endowment but not for a unit-linked endowment.
• B. with-profits bonuses are guaranteed to be paid annually, but unit-linked bonuses are not guaranteed.
• C. holders of unit-linked endowments benefit fully from the fund's investment performance, but a with-profits policyholder may not benefit fully from fund investment performance.
• D. with-profits endowment policy charges are more transparent than those on unit-linked policies.

Answer: (C)

The main idea being tested is how policyholders participate in investment results under unit-linked versus with-profits endowments. In a unit-linked endowment, you directly own units in underlying investment funds, so the value of your policy tracks the actual performance of those funds. You bear the investment risk, and your maturity value moves up or down with the fund’s unit price after charges. There are no insurer bonuses added on top; you get what the fund-based value delivers. In a with-profits endowment, the policy participates in the insurer’s profits through declared bonuses rather than directly in the fund’s unit value. Bonuses are smoothed and allocated by the insurer, which means you may not receive the full upside of the underlying investment performance. The insurer can retain some profits for smoothing or future bonuses, so the final value depends on declared bonuses rather than the exact fund performance. That’s why the correct statement highlights the fundamental difference: unit-linked policies let you benefit fully from the fund’s actual performance, while with-profits policies may not pass through all investment gains due to smoothing and insurer discretion. The other options talk about guarantees, annual bonus guarantees, or transparency of charges, which are not the central distinction between these two types of endowments.

The main idea being tested is how policyholders participate in investment results under unit-linked versus with-profits endowments. In a unit-linked endowment, you directly own units in underlying investment funds, so the value of your policy tracks the actual performance of those funds. You bear the investment risk, and your maturity value moves up or down with the fund’s unit price after charges. There are no insurer bonuses added on top; you get what the fund-based value delivers.

In a with-profits endowment, the policy participates in the insurer’s profits through declared bonuses rather than directly in the fund’s unit value. Bonuses are smoothed and allocated by the insurer, which means you may not receive the full upside of the underlying investment performance. The insurer can retain some profits for smoothing or future bonuses, so the final value depends on declared bonuses rather than the exact fund performance.

That’s why the correct statement highlights the fundamental difference: unit-linked policies let you benefit fully from the fund’s actual performance, while with-profits policies may not pass through all investment gains due to smoothing and insurer discretion. The other options talk about guarantees, annual bonus guarantees, or transparency of charges, which are not the central distinction between these two types of endowments.