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With Profits Policies

What is a With Profits Policy?

With Profits policies are generally long term investments. And with Profits Policy often includes some form of life cover. With Profits policies differ from other investments in that the growth is added in the form of bonus payments. With Profits funds can generally be found in Endowments, Pensions, Bonds or Annuities.

How are With Profits Policies Invested?

The sums invested by policyholders are pooled into a with profits fund. The money is invested into a variety of assets, usually Cash, Corporate Bonds, Gilts, Commercial Property, and Shares. The composition of the fund varies depending on the individual insurer and the purpose of the fund.

How do With Profits Policies grow?

Once a year the insurer shares out the profit that the fund has made to its policyholders in the form of a bonus. This is known as the Annual or Reversionary Bonus. The insurer does not have to add a bonus every year, but once a bonus has been added it cannot normally be taken away as long as you keep within the terms and conditions of the policy. If you cash in your policy early you may lose some or all of your annual bonuses.

The insurer may also add another bonus when your policy matures. This is called the Final or Terminal Bonus. Its purpose is to ensure that you get your fair share of the with profits fund.

Bonuses are decided based on the performance of the investments in the fund. The insurers also add a process called smoothing. This holds back some of the investment returns in good years in order to top up the bonus in years where the performance has not been good.

Ending a With Profits Policy early

Ending a with profits policy early could result in loss of bonuses, and you should check the terms and conditions of the policy thoroughly before doing so. With Profits policies also have valuable Life Cover, and you should check that you don't still need this before thinking about cashing in the policy.