Difference between Accumulating and Conventional Contracts

Hi Muskan

The big difference between conventional with-profits (CWP) and accumulating with-profits (AWP) is the way that bonuses are added. For CWP the bonuses are added to the sum assured. For AWP the bonuses are added to the fund value and the sum assured stays the same.

In other respects CWP and AWP are very similar. They are both types of the additions to benefits method. They both have regular bonuses and they both defer the distribution of surplus through a terminal bonus. Both contracts will aim to payout the (smoothed) asset share.

Let's look at the differences in more detail.

A CWP endowment assurance will pay out the sum assured plus bonuses on death or maturity. The insurer will declare reversionary bonuses each year so that the policyholder will have some idea of what their future benefit will be (although they won't know their terminal bonus until the end). However, the policyholder will have very little idea of what their policy is currently worth as the sum assured and bonuses will be paid in the future, so their true value can only be obtained by calculating an expected present value.

Contrast this with AWP. This looks quite similar to unit-linked. The fund value gives a pretty good idea of the current value of the policy (although it might be adjusted by terminal bonus or a market value reduction). The fund value could be calculated in a similar way to unit-linked. The Fund grows when premiums are added and bonuses are added, but falls when charges are deducted. On death the endowment assurance policyholder gets the larger of the sum assured and the fund value. Note the sum assured is fixed and doesn't change with bonuses.

So CWP starts with a big sum assured that goes up slowly with reversionary bonuses. AWP starts with a small fund (the first premium less initial charges), but grows more rapidly with bonuses and premiums.

On surrender, both CWP and AWP may pay a guaranteed amount, maybe linked to the premiums paid. But later on the surrender value is likely to be related to the asset share. For AWP, the asset share will be relatively close to the fund value - if the asset share is bigger than the fund value then a terminal bonus may be added - if the asset share is less than the fund value then a market value reduction might be applied. For CWP the sum assured plus bonuses will be very different to the asset share and so the guarantees cannot be used as a starting point for the surrender value.

CWP policies often benefit from all sources of surplus, eg investment, mortality and expenses. AWP policies might do the same. However, it is also common for AWP policies to use mortality and expense charges so that these surpluses go to the insurer in a similar way as for unit-linked.

I hope this helps to see the differences between CWP and AWP.

Best wishes

Mark