First Year Bonus
There are ongoing charges on WP Bonds. These may be explicit (i.e. "we will charge x% of the fund each year") or implicit (i.e. we won't tell you but will do it anyway). The latter should appear in the disclosure quotation in any case. Some of these charges would cover the cost of the first year bonus.
Then of course there is the surrender penalty. Basically this is a percentage charge on the units of the fund which declines as time goes on. So, if you take out a policy, get allocated the first year bonus and cash it in shortly afterwards, do not expect to get your money back (and thats before MVAs).
With regard to Brian Wood's comments...whether he is right or wrong depends on how the life insurer will smooth out the returns. This apart, a couple of comments :
1. If WP Bonds produce a return of 3% p.a. for the next 10 years, unit linked bonds are likely to produce the same!
2. If you took out a WP Bond and UL Bond on 1.1.2002, in theory the WP Bond should produce a higher result as there should be smoothing down of poor investment returns. There could be one terminal bonus per year of purchase of units. By definition this would be based on the "average" return for the year.
3. If you took out a WP Bond and UL Bond today, the opposite should be the case as there would be smoothing as life insurer would want to build up its reserves.
Now here's the question, it could take a long time to build up the reserves. Given the hit that life insurers have taken over the last number of years, who's money is used to rebuild reserves? The policyholder's or the shareholders money? Answers on a post card please!