Types of with-profits fund

There are two types of with-profits fund – conventional and unitised.

To find out which fund type your policy invests in you should look at your policy documentation or contact your insurance firm.

Conventional with-profits funds

A conventional or traditional with-profits policy is a pooled investment. This means:

• your policy premiums go into a with-profits fund with all the other policyholders who chose to invest in that fund; and
• everyone in the fund shares the profit (with bonuses) and losses, adjusted using a method called smoothing – see below.

Initial guaranteed amount and regular bonuses

Conventional with-profits policies (apart from pension policies) have an initial guaranteed amount called the sum assured :

• The guaranteed amount increases over the life of the policy through regular bonuses – also called reversionary or annual bonuses.
• Once added, regular bonuses cannot be removed.
• You usually receive your regular bonus at the end of each policy year. Exactly when may vary from insurer to insurer.
• If you cash your plan in early the amount is no longer guaranteed.

For more information see Bonuses.

Bonus rates

• The insurer groups policies into 'classes' that share the same regular bonus rate.
• Factors such as the type of policy you have, any guarantees included and the date you took out your policy determine it's class.
• The bonus rate can vary between different classes – so if you have more than one with-profits policy with the same insurer they may not share the same bonus rate.
• Future bonus rates can be higher or lower than bonuses you received before.

Current guaranteed amount

The current guaranteed amount is the initial guaranteed amount plus any bonuses added when a claim is made on death, maturity or retirement.

• Usually this comes with an added, discretionary terminal bonus.
• The terminal bonus can vary within classes of policies, for example by calendar year of issue or payment of premium.

Benefits payable at other times – such as surrender, transfer, or partial withdrawal of the policy – are at the insurer’s discretion.

Unitised with-profits funds

With a unitised with-profits policy your premiums buy units in the with-profits fund at the current unit price.

• Your part of the fund is tracked and the value of the units depends on the funds' profit and loss.
• A unitised with-profits policy allows investing part of your premiums in the with-profits fund and part in other, unit-linked funds offered by the insurer.

There are two basic types of unitised with-profits fund:

• Fixed price – the unit price does not vary, so regular bonuses add extra units to the policy at the same price.
• Variable price – the unit price increases with regular bonuses and the policy is guaranteed not to fall in value. The most common method of allocating the bonus is with daily increases to the unit price throughout the year.

Once you receive a regular bonus it cannot be taken away. However if you cash in your policy early or move your policy from the unitised with-profits fund your insurer may apply a Market Value Reduction (MVR). An MVR reduces the amount your units are worth and your firm may adjust the unit price to take this into account.

Smoothing

Smoothing allows the insurer to keep back some of the profits from the fund in good years to make up for losses in the bad years, such as when the stock market falls. It is a tool to make sure the fund is less volatile than funds which track a stock market index for example.