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HMRC internal manual

Insurance Policyholder Taxation Manual

Types of insurance policy used for investment: with-profits and without-profits policies


Traditionally, the most common form of investment-type life policy is the with-profitspolicy commonly used for endowment policies, including mortgage endowments. There is aminimum ‘sum assured’ that is augmented through the declaration of’bonuses’, reflected in policyholders’ reasonable expectation to share inprofits and the insurers’ duty of fairness.

’Sum assured’ is the cash benefit guaranteed by the insurer. It is differentfrom the ’surrender value’. This is the cash value of a whole life or endowmentinsurance when discontinued, and can be small in the early years of a policy when expensesare high but there has been time for little growth.

’Reversionary’ or annual bonuses are generally declared year by year. They areguaranteed additions to the sum assured and payable in the same circumstances.Additionally, a ’terminal bonus’ may be declared at maturity or surrender, atthe discretion of the insurer. Benefits may therefore comprise sum assured, accruedreversionary bonuses and a terminal bonus. The insurer determines the amount of bonusesfollowing an actuarial assessment of its obligations to policyholders and the value of itswith-profits funds.

The popularity of with-profits policies has declined somewhat following, amongst otherthings, adverse stock market conditions that resulted in some insurers making ’marketvalue reductions’ to the value of the reversionary bonuses. These may be applied ifthe value of the fund assets falls and the viability of the fund is threatened. There hasalso been criticism of the opacity of the valuation and award process. The advantage liesin the smoothing of returns that protects in some measure against adverse stock marketmovements.

Unitised with-profits

Some insurers offer ‘unitised’ as well as conventional with-profits policies.Here a with-profits fund is notionally split into units. This is purely an internalbookkeeping exercise and the units are not like the units in unit trusts. The‘units’ are backed by a pool of assets, or fund, into which the premium is paid.But the bid price, or value of units to the investor, is not directly linked with assetmovement, as it would be if the policy were unit-linked. Instead, the insurer controls theprice of units, or sometimes the number of them, by allocating bonuses to the tranche ofpolicies to which the units relate. The fund in question is often a specified sub-fundrather than a whole with-profits fund.

Sometimes the term may be applied to with-profits and investment-linked funds comprised inthe same policy with the choice of switching between the two.


In this case there is a fixed sum assured. It may refer to a variety of products

  • term insurance - pure protection
  • unit-linked policies, where there is no smoothing, see IPTM1400
  • guaranteed and indexed bonds, see IPTM1420
  • fixed return.
Further reference and feedback IPTM1013