With-Profits Bonds

The idea of 'With-Profits Bonds' is to smooth out the fluctuations in the market - presenting policyholders with a very low risk, low volatility investment. 'With Profits policies' have become attractive to many investors because every year the value of the investor's policy has tended to grow and providing the policies is held to its maturity, it ought not to fall in value. But that doesn't mean it won't, especially if the stockmarket heads south!

On a superficial level, a 'With Profits' policy or bond works like this:

Once a year the fund manager looks at his investments and estimates how much growth he is likely to achieve in the 12 months ahead. For example, he might decide that he was going to make 9% in the coming year. After making adjustments for previous over/under performance, he might then decide to distribute 8.5% to policyholders. This would be added to all policies when the 'annual bonus' is declared for the year.

Clearly, even though the insurance company's investments are fluctuating each day, policyholders are insulated from such short term volatility.

This cushioning of investors is reassuring to many policyholders, and at the end of the life of the investment, most companies give an additional bonus, 'a terminal bonus'. This 'top up' bonus is a one off and it reflects the fact that the annual bonuses accruing to the investor's policy will not have reflected the full investment performance of the fund. In other words, the insurance company holds back some of its investment gains it's made on your behalf and then gives it to you as a little sweetener at the maturity of the policy. It should also be noted that an MVA (Market Value Adjuster) can be imposed by the provider at their discretion. This is often imposed when there is a stock market slow-down, effectively reducing the value of the investment.

In summary - With-Profits bonds can be very secure and comfortable - but you must regard your capital as being tied up for at least five years. In the case of a With-Profits savings policy, you need to continue paying into the policy until it matures. If you don't, you'll suffer because insurance companies penalise those who surrender early.

See also: Insurance Bonds - overview , Managed bonds , Distribution Bonds , and Equity Bonds .

Last Updated: June 2006 © Moneyextra.com

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