With Profits / Market Value Adjustment (MVA) / Market Value Reduction (MVR) / Bonus Rate / Terminal Bonus
With-profits policies are medium- to long-term investment funds offered by insurance companies. These aim to provide a return linked to the stock market but with fewer ups and downs than investing directly in shares.
The costs of running the insurance company’s business are deducted from the fund and what is left over (the profit) is available to be paid to the with-profits investors. You get your share of profits in the form of annual bonuses added to your policy.
The company usually tries to avoid big changes in the size of the bonuses from one year to the next. It does this by holding back some of the profits from good years to boost the profits in bad years – this process is called ‘smoothing’.
Usually, once added, bonuses can’t be taken away. But if you surrender early, the insurance company may limit some or all of the bonuses paid by applying a Market Value Reduction (MVR) – or Market Value Adjustment (MVA) – to your policy. This is most likely in times of adverse investment conditions like a stock market crash.
You might also get a ‘terminal bonus’ when your policy matures.
This method can make the returns harder to understand and as such they are now a less popular form of investing.