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Life Insurance with Profits Endowment
Insuring one’s life is ensuring that the family you leave behind is taken care of financially at least. A With-Profits policy, as it is called in the UK, is nothing but a contractual insurance that allows the policy holder to take part in the profits reaped by an insurance company. Very often, such a company is a mutual life insurance one.
The With-Profits policies aimed at achieving capital growth on a long term basis. Here, the investor generally researches into the company’s financial strength, its returns over the years and the terms they offer contractually.
On the part of the insurance, they generally distribute their profits or share them with the people who hold the With-Profits policy through what they call a ‘bonus’. In the US and other Asian countries they are termed as ‘dividends’.
With-Profits policies generally fall under one of 2 categories. They can either be Single Premium Contracts or Regular Premium Contracts. Usually, there is a ‘basic sum assured’ to which the bonuses are accrued. The ‘basic sum’ is the minimum amount of money payable to the nominee on the demise of the policy holder. Sometimes, as with Endowment Policies, it is the minimum amount payable on the maturity of the policy. So the value of the plan is the sum total of the basic sum plus the bonuses.
An interesting concept employed in the ‘With-Profits’ fund is that of ‘smoothing’. All that it means is that a certain amount of profits earned during a very positive year is kept back to make sure that in the future during a not so productive year, some of this amount is distributed as returns.
There can be three types of bonuses that can accrue on a ‘With-Profits Endowment’. One is the bonus that is paid out at the end of each financial year, rightly called the ‘Annual Bonus or Reversionary Bonus’. Here it is calculated as the guaranteed bonus per GBP 1000 sum assured together with a percentage of returns obtained by the company during the year. The ‘Final Bonus or Terminal Bonus’ is that which is paid when the policy matures. Sometimes, ‘exceptional Bonus’ is accrued to the company undergoing restructuring or investments that are reaping exceptional returns. But this last bonus is quite unreal to expect.
With-Profit funds were popular at one time. But at the turn of the century, the ‘Market Value Reduction (MVR)’ was adopted by the insurance companies. Because of a period of poor performance of the investments, the companies resorted to limiting the withdrawal value to the value of the life fund’s assets. Again, the Equitable Life company’s inability to meet their guarantees circulated a lot of negative publicity, which has led to the unpopularity of the ‘With-Profits’ policies.
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