With-profits insurance policies

Insurance can of course be broken down into 'cover' and 'savings' - here we are talking about savings!

Many life insurance savings and pension schemes have traditionally been 'with-profits' policies. Policyholders typically save regularly and then receive a bonus each year which is linked to the profits and investment performance of the insurer. These annual bonuses are sometimes referred to as Reversionary Bonuses.

Once they have been credited to a policyholder's account they cannot be taken away. It should also be noted that an MVA (Market Value Adjuster) can be imposed by the provider at its discretion. This is often imposed when there is a stock market slow-down, effectively reducing the value of the investment.

At the end of the policy term, a one off sweetener, a Terminal Bonus, is added to the value of the policy. Annual bonuses and the 'final' Terminal bonus are added to the policyholder's savings plan entirely at the discretion of the insurer.

The level of these bonuses can be volatile and change from year to year. If you decide to surrender a with-profits profits early (say within the first five years), you're likely to receive less than you've paid in premiums. This is because in the early years, much of what you'll have paid will have been used to pay for the set up administration of the policy and even commission to financial advisers .

There's been much criticism of the charging structure of some with-profits providers in recent years leading to a growing popularity of unit linked policies as an alternative. Unit linked policies have some attractions, i.e it's easier for policyholders to follow the value of their investments by looking in the newspaper each day.

See Also: Moneyextra Insurance Service latest rates .

Last Updated: June 2006 © Moneyextra.com

Our senior editor Robin Amlôt recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.