Proposals offered by the FSA to change how early surrender/encashment values are calculated for 'with profits' policies could result in lower "terminal" i.e. maturity bonuses according to a report in industry newspaper Investment week.
In simple terms, the FSA is considering bowing to public pressure on improving values when people have to stop their policies early, however the industry is arguing that this will penalise those loyal policyholders who keep their investment until maturity date.
Our view
The problem here is not the policy or the concept of a with profits plan i.e. getting smooth, steady returns over a period and then getting a true value bonus at the end. It is the problem of insurance companies and financial advisers not explaining what a 'with profits' fund does. 'With profits' should not be sold as low risk investments - it is a simple as that! They should be sold to people as longer term investments that spread out the peaks and troughs of markets and give a smooth return. As long as people understand that they may not get back what they put in if they encash early but should get back a noce steady return if they hold to maturity there should not be a problem.
The product is not the problem, regulation on how it is sold is. Improving surrender values and reducing maturity bonuses will "kill off" the 'with profits' concept.