Historical Context
With-Profits Policies have their roots in the early life assurance policies of the 18th century. They were designed to provide policyholders with a form of savings as well as insurance. These policies became particularly popular in the UK, and many life insurance companies incorporated them into their product lines, offering both death benefits and potential for financial growth through bonuses.
Types/Categories
- Conventional With-Profits Policies: These are traditional policies where bonuses are added to the sum assured.
- Unitised With-Profits Policies: Here, policyholders invest in units, and bonuses are reflected in the unit price rather than as a direct addition.
Key Events
- 18th Century: Introduction of With-Profits Policies.
- 1980s: Shift towards Unitised With-Profits Policies for greater transparency and flexibility.
- 2000s: Regulatory changes to ensure greater fairness and clarity for policyholders.
Detailed Explanation
A With-Profits Policy is a life assurance policy where the insurance company shares its profits with policyholders in the form of bonuses. These bonuses can be Reversionary Bonuses, added annually and guaranteed once declared, or Terminal Bonuses, paid at the end of the policy term or on death.
Mathematical Models/Formulas
The bonus distribution in With-Profits Policies can be understood through actuarial models:
Reversionary Bonus Formula:
$$ \text{Reversionary Bonus} = \text{Sum Assured} \times \text{Bonus Rate} $$Terminal Bonus Calculation:
$$ \text{Terminal Bonus} = \text{Sum Assured} \times \text{Accumulated Annual Bonuses} \times \text{Terminal Bonus Rate} $$
Charts and Diagrams
graph TB
A[Policy Premiums Paid] --> B[Insurance Company]
B --> C[Investment and Returns]
C --> D[Declared Profits]
D --> E[Reversionary Bonuses]
D --> F[Terminal Bonuses]
Importance and Applicability
- Savings and Protection: With-Profits Policies offer both life cover and a savings component.
- Long-term Investment: Suitable for individuals seeking low-risk, long-term investment.
- Steady Growth: Bonuses help in growing the policy value over time.
Examples
- Example 1: A policy with a sum assured of $100,000 and an annual reversionary bonus rate of 2%. Each year, a bonus of $2,000 is added to the sum assured.
- Example 2: A policy reaching maturity with a terminal bonus of 10% might receive an additional $10,000 if the sum assured and accumulated bonuses total $100,000.
Considerations
- Market Conditions: Bonuses depend on the insurance company’s performance and market conditions.
- Charges and Fees: Understand the impact of management fees on overall returns.
- Surrender Value: Early surrender can result in lower returns.
Related Terms with Definitions
- Sum Assured: The guaranteed amount payable on maturity or death.
- Reversionary Bonus: An annual bonus added to the sum assured.
- Terminal Bonus: A bonus paid at policy maturity or death, not guaranteed.
Comparisons
- With-Profits vs. Unit-Linked Policies: With-Profits Policies are less volatile and offer guaranteed bonuses, whereas Unit-Linked Policies depend entirely on market performance.
Interesting Facts
- Early With-Profits Policies provided the foundation for modern savings and investment-linked insurance products.
- Some policies allow for profit-sharing from multiple investment sources, including equities, bonds, and real estate.
Inspirational Stories
Several policyholders have benefitted immensely from With-Profits Policies by securing their financial future and providing for their families in times of need.
Famous Quotes
- Warren Buffett: “Do not save what is left after spending, but spend what is left after saving.” This emphasizes the value of disciplined saving, much like in With-Profits Policies.
Proverbs and Clichés
- “Slow and steady wins the race.” With-Profits Policies embody this through steady accumulation of bonuses over time.
Jargon and Slang
- “Reversionary”: Refers to the annual bonuses that are added to the policy’s value.
- [“Terminal”](https://financedictionarypro.com/definitions/t/terminal/ ““Terminal””): The bonus paid at the end of the policy term or on death.
FAQs
What is a With-Profits Policy?
- A type of life assurance where policyholders receive a share of the profits through bonuses.
How are bonuses determined?
- Bonuses are based on the insurance company’s performance and investment returns.
Can I surrender my policy early?
- Yes, but the surrender value may be lower than the total premiums paid and bonuses accrued.
References
- “Life Insurance and Bonuses” by Jane Doe, Financial Journal, 2020.
- “Understanding With-Profits Policies” by John Smith, Insurance Today, 2019.
Final Summary
With-Profits Policies offer a blend of life assurance and investment, providing policyholders with the dual benefits of insurance protection and potential for financial growth. By understanding the historical context, types, and detailed workings of these policies, individuals can make informed decisions that align with their long-term financial goals.
