With-Profits Policy Types and Long-Term Performance

There are several types of with-profits policies, including unit-linked with-profits policies and non-unit-linked with-profits policies.

Unit-linked with-profits policies, on the other hand, link the value of your policy to the performance of a specific investment fund or a basket of funds.

Non-unit-linked with-profits policies, meanwhile, invest in a pool of assets managed by the insurer, which can include stocks, bonds, and property.

The investment performance of a with-profits policy can have a significant impact on its long-term performance.

A with-profits policy is a type of investment-type life policy that's commonly used for endowment policies, including mortgage endowments.

It traditionally guarantees a minimum 'sum assured', which is the cash benefit promised by the insurer.

The 'sum assured' is different from the 'surrender value', which is the cash value of a whole life or endowment insurance when discontinued.

The surrender value can be small in the early years of a policy when expenses are high but there has been time for little growth.

Reversionary or annual bonuses are generally declared year by year, and are guaranteed additions to the sum assured.

Terminal bonuses may also be declared at maturity or surrender, at the discretion of the insurer.

The insurer determines the amount of bonuses following an actuarial assessment of its obligations to policyholders and the value of its with-profits funds.

With-profits policies have declined in popularity due to adverse stock market conditions that resulted in some insurers making 'market value reductions' to the value of the reversionary bonuses.

Market value reductions may be applied if the value of the fund assets falls and the viability of the fund is threatened.

A with-profit policy is a type of life insurance policy that allows policyholders to share in the profits or surplus generated by the insurance company.

Policyholders can expect to receive a reversionary bonus, which is guaranteed to be paid at maturity and cannot be removed after declaration.

The annual bonus can be broken down into two parts: a guaranteed bonus, which is set at the outset of the policy and usually cannot be varied, and the rest of the bonus, which depends on the investment return achieved by the fund subject to smoothing.

The terminal bonus is awarded and paid at the maturity and sometimes the surrender of the policy, and represents the member's entitlement to a proportion of the fund that has been held back for the purpose of smoothing.

There are two main categories of with-profits policies: single premium contracts and regular premium contracts.

Single premium contracts include insurance bonds, single premium endowments, and single premium pension policies. These policies are typically paid in full upfront, and the insurer invests the money on your behalf.

Regular premium contracts involve making premium payments, usually monthly, and are commonly used for endowment policies and pension policies. This type of contract can help spread the cost of premiums over time.

Here are the main types of with-profits policies:

With-profit policies work by granting policyholders the opportunity to participate in the profits generated by the insurance company. The extent of participation is typically determined by a formula specified in the policy, which considers factors such as the policy's duration, the sum assured, and the insurer's financial performance.

Policyholders can expect to receive a minimum 'sum assured', which is the cash benefit guaranteed by the insurer. This is different from the 'surrender value', which is the cash value of a whole life or endowment insurance when discontinued.

Reversionary or annual bonuses are generally declared year by year and guaranteed to be paid at maturity. These bonuses are additions to the sum assured and payable in the same circumstances. A terminal bonus may also be declared at maturity or surrender, at the discretion of the insurer.

The insurer determines the amount of bonuses following an actuarial assessment of its obligations to policyholders and the value of its with-profits funds. Market value reductions may be applied if the value of the fund assets falls and the viability of the fund is threatened.

Policyholders can expect to receive a reversionary bonus, which is awarded during the term of the insurance contract and guaranteed to be paid at maturity. A terminal bonus may also be awarded and paid at the maturity and sometimes the surrender of the policy.

The insurance company has some freedom to decide what mix of bonuses to pay, which can affect the overall payout to policyholders. An insurer may decide to pay low annual bonuses and a high terminal bonus to protect against falls in the investment markets.

Smoothing is a key feature of with-profits funds that helps to reduce the impact of market changes on the fund's value. It involves holding back a proportion of profits earned in good years to ensure a reasonable return is paid during years of poor performance.

This means that the unit price of a with-profits fund may not fluctuate as much as other stocks or shares, creating a smoothed effect. An important difference between this and normal statistical smoothing is that it has to be attempted without knowledge of future developments.

Smoothing is a deliberate attempt to balance the level of risk and expected increases in the fund value over the long-run. By doing so, investors are less directly exposed to rises and falls in the value of their investments over the shorter-term.

Ideally, with-profits funds should be held for 10 years or more to allow the smoothing effect to take full effect. This can be especially beneficial for investors who are using the fund to fund a specific event, such as retirement.

With-profits policies offer a unique feature called bonuses and dividends, which can significantly impact the overall value of your policy.

Bonuses can be of two types: reversionary bonuses and terminal bonuses. Reversionary bonuses are typically added annually to the policy's cash value, effectively increasing the overall benefit payable upon maturity or death.

Dividends, if applicable, are typically provided to policyholders who hold participating policies with certain insurance companies.

A reversionary bonus is awarded during the term of the insurance contract, and guaranteed to be paid at maturity. It cannot be removed after declaration.

The annual bonus may consist of two parts: the guaranteed bonus and the rest of the annual bonus, which depends on the investment return achieved by the fund subject to smoothing.

The terminal bonus is awarded and paid at the maturity and sometimes the surrender of the policy. It is sometimes referred to as the final bonus.

An insurance company has some freedom to decide what mix of bonuses to pay, which can affect the overall value of your policy.

An insurance company may decide to pay low annual bonuses and a high terminal bonus, which can protect the company from falls in the investment markets but may be unattractive to investors.

Occasionally, an insurer may decide to pay an exceptional bonus possibly due to restructuring of the company or exceptional investment returns.

Perceived risk and actual risk can be vastly different when it comes to with-profits policies. For many years, these policies were seen as a safe alternative to deposit accounts, but the reality was that many insurers used high-risk financial instruments to achieve returns.

The UK regulator imposed a new regulatory regime in the early 2000s, requiring insurers to move their funds into lower-risk investments and lower projection rates to more accurately predict future returns. This change was a response to growing consumer complaints following the introduction of market value reductions.

A long-term commitment is required for with-profit policies, and policyholders should carefully review the terms and conditions before making a decision.

Market Value Decrease is a mechanism used by insurance companies to ensure that policy withdrawal payments are reasonable.

This is done to reflect the reduction in the underlying value of the assets of the life fund, which can happen after a period of poor investment performance.

The insurance company will reduce the withdrawal payment to match the reduced value of the assets, which is known as a Market Value Reduction or Market Value Adjustor.

This means that policyholders may not receive the full amount they expect when they withdraw from their policy, but it's a necessary step to maintain the integrity of the life fund.

The value of the withdrawal is reduced to reflect the reduced value of the assets, which can have a significant impact on policyholders who rely on these payments.

In some cases, this can lead to a decrease in the policy's value, but it's essential to understand that this is a standard practice in the insurance industry.

Many investors, especially elderly ones, thought with-profits policies were a safe alternative to deposit accounts for years.

This perception was fueled by steady reliable returns and unscrupulous sales tactics from insurers.

The reality was that many insurers used high equity exposure and high-risk financial instruments to achieve those returns.

In the early 2000s, the UK regulator imposed a new regulatory regime for with-profit providers in response to growing consumer complaints.

The realistic reporting regime required insurers to move more funds into lower-risk investments like corporate bonds and gilts to cover liabilities.

Insurers also had to lower projection rates in line with their new asset mix to more accurately predict future returns.

Making a long-term commitment to a policy can be a significant decision, and it's essential to understand the potential risks and rewards. Policyholders should carefully review the terms and conditions of the policy and assess the insurer's track record.

Investment strategies play a crucial role in the policy's performance, as insurance companies aim to generate favorable returns from premium payments. Policyholders should consider the insurer's investment strategies before making a commitment.

A long-term commitment is often necessary to realize the benefits of a policy, which can occur over an extended period. This requires patience and a clear understanding of the policy's terms and conditions.

With profit policies provide policyholders with the opportunity to participate in the profits generated by the insurance company, offering the potential for additional returns beyond the guaranteed benefits.

A with-profits policy offers the potential for additional returns on your life insurance investment, allowing you to participate in the profits earned by the insurance company through various investment activities.

These additional returns can result in potentially higher returns compared to non-participating policies, making a with-profits policy a popular choice among individuals seeking life insurance coverage with the potential for long-term growth and participation in the insurer's financial success.

The policy's cash value or maturity value can increase over time as policyholders make regular premium payments and participate in the profits, providing a valuable financial asset that can be utilized for various purposes, such as funding future expenses, retirement planning, or leaving a financial legacy for loved ones.

Unitised with-profits policies work in a similar way to conventional policies, but with a twist. They represent the policy value as a number of units, which can increase in value over time.

The unit price can either remain fixed or increase each year, depending on the insurer's model. This approach was introduced to compete with unit-linked life policies that became available in the 1970s.

In a unitised policy, the fund value is represented by the bid value of units. This means that the value of the units can fluctuate, but it's not directly linked to the movement of the underlying assets.

Unitised policies often have a sub-fund structure, where the policy is held in a ring-fenced sub-fund of the life fund. This allows for more flexibility and control over the policy value.

Here are some key differences between conventional and unitised with-profits policies:

Overall, unitised with-profits policies offer a different approach to traditional with-profits policies, with more flexibility and control over the policy value.

With Profits Funds are a type of 'pooled investment' fund where you pay into the fund along with other investors and your money is invested in stocks, shares, equities, bonds, and property over a set period of time.

This type of fund is known for its diversity, which helps balance the level of risk and the expected increases in the fund value in the long-run.

With Profits Funds invest in a variety of assets, including stocks, shares, equities, bonds, and property, which helps to spread out the risk.

The fund's investments are designed to be long-term, with a recommended holding period of 10 years or more to maximize returns.

Smoothing is a key feature of With Profits Funds, which aims to reduce the direct impact of market changes on the fund investments and means that investors are less directly exposed to rises and falls in the value of their investments over the shorter-term.

This smoothing effect is particularly beneficial when the fund is being used to fund a specific goal, such as retirement, where predictability is crucial.

You can manage your with-profits policy online, which is a convenient and time-saving option. You can check your policy details, make payments, and update your personal information.

It's a good idea to review your policy regularly to ensure you're on track to meet your financial goals. For example, you can check your current policy value and see how it's performing over time.

You can also use the online service to make changes to your policy, such as increasing or decreasing your premiums, or switching to a different investment option. This can help you adapt to changes in your financial situation.

It's worth noting that some policies may have a minimum payment amount or frequency, so be sure to check your policy terms and conditions before making any changes.