With-profits Insurance Policies

Where from? Life insurance companies, life insurance brokers and other investment advisers.

How they work There are different types of policy. With a regular premium plan, you invest monthly or annually, often for a set period (the 'endowment' period) such as ten years. At the end you get back a lump sum which is made up of a guaranteed sum plus bonuses which have been added. 'Reversionary' bonuses are added at intervals throughout the life of the plan, and a 'terminal' bonus is added when the plan matures. The proceeds of different plans vary enormously - the best performers can give you more than double the worst. The amount of each bonus depends on the general profitability of the insurance company and will be influenced by such things as how well the company's investments perform, its expenses in running its business, distributions to shareholders, if there are any, and so on. Once added, bonuses can't be taken away. But if you want to stop or cash in your plan early there could be early surrender penalties and you might even get back less than you'd invested. 'Whole life' policies do not run for a set period but, as the name suggests, for the whole of your life, though you might not have to carry on paying premiums after a certain age - say, 75. A whole life policy accumulates a `cash-in value' which can be substantial as the policy ages. But there are usually hefty surrender penalties if you cash in during the early years.

With single premium plans you invest a lump sum which earns bonuses in the same way as regular premium policies. With single premium plans, there is often a facility to enable you to withdraw a regular income.

Minimum investment Varies. Regular premium plans - around £45 a month, say. Single premium plans - around £4,000, say.

Maximum investment None.

Tax Varies according to the type of plan. Most regular premium plans are 'qualifying policies'. With these, there's no tax for you to pay as long as you hold the policy for at least ten years (or three-quarters of its original term if less). If you cash it in early, there's still no tax to pay if you're a basic rate taxpayer but there could be some to pay if you're a higher rate taxpayer. Tax has already been paid by the life insurance company and can't be reclaimed by non-taxpayers. Complicated rules apply to taking income from 'non-qualifying plans' and to the potential tax bill of higher rate taxpayers - ask the company to explain, or see Which? Tax-Saving Guide (published annually in March).

Good for Anyone seeking a medium-risk investment. Regular premium plans are good for people who can commit themselves to regular saving for a long period. Single premium plans can be useful if you want a regular income.

Bad for People who really want life insurance. People who might need their money back early.

TIP - With-profits insurance policies provide a half-way house, in terms of risk, between the relatively safe but generally low-earning deposit-type investments and the relatively high-risk-high-return investments, such as shares, unit trusts and unit-linked life insurance.

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Local Authority Bonds

Where from? Banks or stockbrokers.

With-profits insurance policies

How they work These are similar to British Government stocks but are issued by local authorities instead of the central government. You invest a lump sum. You can choose to invest until redemption and get a fixed return, or you can sell earlier on the stock market. If you hold to redemption, you get back the same amount that you invested, so your overall return is made up only of interest. If you sell before redemption, what you get back will depend on the market price at the time you sell, and the return is made... see: Local Authority Bonds

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