Finance - With Profit Policies

With Profit Policies

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The aim of a with profits fund is to smooth over the gains and losses made by a fund's performance. What the insurance company normally does is to declare a fixed return for each year, called an "annual bonus". This is often announced in advance of the year and set above base, so that it remains competitive with the interest base rate.

The way a with-profit fund works is as follows. To begin with, normally you will have a fund that consists of investments in cash, bonds, equities and property. At the end of a good year, some profit is retained in the fund, with a reserve that is allocated to a "top up" fund. At maturity, a proportion of the reserve is added to the maturing amount, in the form of a terminal bonus. In weak years, the reserve is added to the performance, to smooth out the overall performance.

Insurance companies found that between 2001 - 2003, this type of fund was expensive to maintain - as they had to add some of their own capital to the fund in order to meet the liabilities. Therefore, in the future this type of fund may disappear from the shelves.