With profits funds are designed to smooth out the peaks and troughs on investment markets.
A ‘smoothed out’ bonus is designed to be added each based upon investment gains and losses over that year and previous years.
If at the end of the policy, maturity or cash in, you may also receive a terminal/final bonus if there are any reserves still left.
Stock Market Crashes
As a general rule, when stock markets fall, your with profits fund will NOT fall in value as it has been designed the smooth out the peaks and troughs of markets. That said, if you try to cash in your investment early, in normal times you should have no problems BUT in extreme market falls and if the bonuses you have had are higher than the value of assets in the fund i.e. all reserves used up and you have more than the fund is worth, policy providers may impose an MVA – a Market Value Adjustment on your plan. Sometimes known as an MVR market value reduction or a MVAF market value adjustment factor.
In simple terms, stock market falls do not instantly affect the value of a with profits fund but they may do if market falls are significant and in place for a longer period.