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With-profits policy
A with-profits policy (Commonwealth) or participating policy (U.S.) is an insurance contract that participates in the profits of a life insurance company. The company is often a mutual life insurance company, or had been one when it began its with-profits product line. Similar arrangements are found in other countries such as those in continental Europe.
With-profits policies evolved over many years. Originally they developed as a means of distributing unplanned surplus, arising e.g. from lower than anticipated death rates. More recently they have been used to provide flexibility to pursue a more adventurous investment policy to aim to achieve long-term capital growth. They have been accepted as a form of long-term collective investment whereby the investor chooses the insurance company based on factors such as financial strength, historic returns and the terms of the contracts offered.
The premiums paid by with-profits and non-profit policyholders are pooled within the insurance company's life fund (Commonwealth) or general account (USA). The company uses the pooled assets to pay out claims. A large part of the life fund is invested in equities, bonds, and property to aim to achieve a high overall return.
The insurance company aims to distribute part of its profit to the with-profits policy holders in the form of a bonus (Commonwealth) or dividend (USA) attached to their policy (see the bonus section). The bonus rate is decided after considering a variety of factors such as the return on the underlying assets, the level of bonuses declared in previous years and other actuarial assumptions (especially future liabilities and anticipated investment returns), as well as marketing considerations.
There are two main categories of with-profits policies:
Conventional with-profits contracts have a basic sum assured to which bonuses are added. The basic sum assured is the minimum amount of life assurance payable on death; for endowment contracts it is also the minimum lump sum payable at maturity.
The basic sum assured attracts reversionary bonuses which are used to distribute profits to the policy. Once a reversionary bonus is added it cannot be removed from the policy. The required premiums must have been maintained to receive payment of the basic sum assured and bonuses. If the premiums have not been maintained, a reduced amount (or in some cases none) will be paid. For insurance bonds, the basic sum assured plus bonuses represents the plan value. When the policy matures, a final bonus may be added to reflect the policy's share of profits which have not yet been distributed.
Unitised with-profits policies work in a similar way except that the policy value is expressed as a number of units. Various models have been adopted by different insurers, but typically either:
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With-profits policy
A with-profits policy (Commonwealth) or participating policy (U.S.) is an insurance contract that participates in the profits of a life insurance company. The company is often a mutual life insurance company, or had been one when it began its with-profits product line. Similar arrangements are found in other countries such as those in continental Europe.
With-profits policies evolved over many years. Originally they developed as a means of distributing unplanned surplus, arising e.g. from lower than anticipated death rates. More recently they have been used to provide flexibility to pursue a more adventurous investment policy to aim to achieve long-term capital growth. They have been accepted as a form of long-term collective investment whereby the investor chooses the insurance company based on factors such as financial strength, historic returns and the terms of the contracts offered.
The premiums paid by with-profits and non-profit policyholders are pooled within the insurance company's life fund (Commonwealth) or general account (USA). The company uses the pooled assets to pay out claims. A large part of the life fund is invested in equities, bonds, and property to aim to achieve a high overall return.
The insurance company aims to distribute part of its profit to the with-profits policy holders in the form of a bonus (Commonwealth) or dividend (USA) attached to their policy (see the bonus section). The bonus rate is decided after considering a variety of factors such as the return on the underlying assets, the level of bonuses declared in previous years and other actuarial assumptions (especially future liabilities and anticipated investment returns), as well as marketing considerations.
There are two main categories of with-profits policies:
Conventional with-profits contracts have a basic sum assured to which bonuses are added. The basic sum assured is the minimum amount of life assurance payable on death; for endowment contracts it is also the minimum lump sum payable at maturity.
The basic sum assured attracts reversionary bonuses which are used to distribute profits to the policy. Once a reversionary bonus is added it cannot be removed from the policy. The required premiums must have been maintained to receive payment of the basic sum assured and bonuses. If the premiums have not been maintained, a reduced amount (or in some cases none) will be paid. For insurance bonds, the basic sum assured plus bonuses represents the plan value. When the policy matures, a final bonus may be added to reflect the policy's share of profits which have not yet been distributed.
Unitised with-profits policies work in a similar way except that the policy value is expressed as a number of units. Various models have been adopted by different insurers, but typically either: