One type of life assurance based investment that is tested in R02 is with-profits policies.

With-profits policies are medium- to long-term investment funds offered by insurance companies. The money invested is pooled and invested in the insurance company’s with-profits fund. The fund is managed by a professional investment manager. The costs of running the insurance company’s business are deducted from the fund and what is left over is available to be paid to the with-profits investors.

With-profit policies are available in both regular and single premium contracts, although in recent years the bulk of new investment has been in single premium bonds.

Bonuses

With-profits investment performance is reflected in bonuses that attach to the policy, they are added to the value of the policy annually:

• Bonuses are based on the company’s profits from its investments and are not guaranteed but once they are added they cannot be taken away.
• Annual bonuses are generally set at a rate that the insurance company’s actuary believes represents the long-term returns from the funds.
• They reflect the income yields on investments in a smoothed, long-term fashion.
• Final bonuses are paid when the policy matures or on death and generally tend to represent more of the capital growth that the insurance company has made on its funds.
• Final bonuses are more volatile and more directly affected by changes in the investment markets.
• Final bonuses vary and are not guaranteed.