With Profits Endowment Policy
A with profit endowment policy is where a life assurance company agrees to pay its client a fixed amount(Called the amount assured) at the end of a fixed term determined by contract and providing that the premiums have been paid. The final amount will include any profits accumulated from the money. These profits are declared annually and are paid to the assured person when the contract is finished. In the result of death by the policy holder, the money will be paid directly to his estate. The policies are normally paid for monthly. The life assurance companies use most of this money to invest and then share the profits with their policy holders each year. In effect, the policy holder is taking a share of the life assurance companies profits from wise investments
Bonuses are as follows:
Reversionary Bonuses: These bonuses are declared annually as cash values computed as percentages of the basic sum assured and of bonuses declared in previous years. Once granted, these bonuses are guaranteed, cannot be withdrawn and are also known as attaching bonuses.
Special Bonuses:
These are one-off bonuses, granted at the discretion of the life company and are also guaranteed. For example, if a friendly society converts to a public company they may grant such special bonuses to each policy in force, instead of issuing free shares in the new company.
Terminal Bonuses:
Most life companies currently grant an additional bonus at
the end of the life of a policy. In essence this is a loyalty
bonus designed to encourage the policy holders to keep the
policies in force until the maturity date. The size of the
terminal bonus is dependent upon the investment conditions
prevailing at the time of maturity, as well as upon the investment
performance of the life company. Although it can be a large
part of the final sum paid out, it is not guaranteed. Bonuses
issued by any life company are dependent upon its financial
strength which, in turn, relies heavily on its investment performance.
It is in the interests of the life companies to even out the
vagaries of the investment environment, by declaring bonuses
which are reasonably consistent. However, bonuses may be increased
or decreased from year to year, thereby affecting the final
value of the underlying policy.