With-profit life assurance costs more but this kind of policy returns annual and terminal bonuses.
The extra cost in premiums paid, compared to a non-profit policy - for the same sum assured - entitles the policyholder to share in the profits made by the assurance company.
The company makes its profits by investing the premiums in the stock market. It then declares annual bonuses (revisionary bonuses) which it shares out amongst its policyholders.
Once the bonuses have been allocated to the policyholder, they cannot be removed in future years.
Annual bonuses can be simple - calculated as a percentage of the sum assured, or compound - based on a percentage of the sum assured plus bonuses to date.
The terminal bonus may, or may not, form part of the settlement of a with-profits policy, when it becomes payable (on maturity or on the death of the policyholder).
It depends on the company and on how well, or otherwise, their investments have performed over time.
If the stock market has been performing poorly, the terminal bonus may be reduced, or even removed.
A with-profit assurance policy is often used as a mortgage investment vehicle (low-cost endowment) to pay off the loan capital.
