About With Profits

If you have a with-profits policy or fund, you may well wonder exactly what is (or are?) these things called “with-profits”? Good question!

We will try to explain this as simply as possible given that with-profits captures a multitude of different investment types and structures.

Basically think of with-profits in the same way you may think of dinosaurs. Dinosaurs described a certain type of creature but beneath this were hundreds of individual types of dinosaur (for example the brontosaurus) and these different types, although all classified as dinosaurs, were actually individually quite distinct.

So it is with with-profits, this is a broad description of an investment which has a whole series of different types of with-profit fund, that in many ways are quite distinct.

With-profits is so called because in the distant past insurance companies generally only offered insurance policies (including life assurance) to its customers. They were simple companies and crucially, were owned by their customers, the policyholders. An insurance company owned by its customers is known as a ‘mutual’.

Very few insurance companies today remain mutual status.

In that distant era, the companies arranged themselves so that the profits were shared out amongst the owners of the business i.e. the customers (policyholders) and therefore when offering life assurance policies mutual insurers devised them as “with-profits”. That is how with-profits came about.

However over the course of time (especially through the 1990s and 2000s), more and more insurers abandoned mutual status and the marketing teams within the insurance companies realised that with-profits was a popular and good way to attract ‘business’ (profitable business at that) and therefore started adapting all sorts of newer type investments and policies and badging them with-profits – even though the investors were no longer participating in the profits of the insurance company that offered them.

With-profits has therefore become rebadged, taken from an old and successful method of rewarding policyholders and converting it into something else, which we will now examine.