Review your with-profits life policy
Now with-profits life policy bonuses are public, dig out your statements and find out how well your policy is performing.
First question is: how much is your policy worth? You can get an estimated maturity value for your policy from your provider, but bear in mind that it’s only an estimate, as the amount that will actually be paid depends on the fund’s future performance and any bonuses.
Secondly, find out where your policy is invested as the fund’s asset allocation affects the returns you can expect.
Funds that are mostly invested in equities have the potential to produce good returns but carry greater risk, while funds with high exposure to bonds and other fixed-interest assets provide greater certainty but have less scope to produce higher returns over time.
Make sure you check the small print of your policy. According to the Financial Services Authority, some with-profits policies allow investors to withdraw on certain dates without a surrender charge.
These are called ‘spot guarantees’ or ‘MVR-free dates’ and will be written in the terms and conditions of the policy. Whether your policy has such a guarantee and when it applies varies between insurers, but it usually applies to older policies.
When reveiwing your with-profits policy, think about what benefits your policy has. Find out about any benefits and consider what you would lose if you cash in.
With-profits life insurance policies, for example, will pay a lump sum if you die (this figure will be on your bonus statement). You will lose this protection if you surrender, so think about any security you need to provide for your family and the cost of replacing it.
You may be considering whether to cash in or not to cash in. Poor performance of with-profits funds over recent years may tempt you to cash in and invest elsewhere. But cashing in – particularly in the first few years – will probably give you less back than you put in. Bear in mind that some with-profits funds have continued to offer excellent returns.
Finally,check your Market Value Reduction (MVR) charge. Companies impose a MVR up to 20% when policyholders leave early. Find out how much you would get if you surrender, if it’s worth incurring the cost and whether you can make it up the better returns on an alternative investment.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).