Spread products are ones where most of the insurance company profits are derived from the insurer generating investment returns which exceed those allocated to the policyholder.

The first type of spread product worth flagging are fixed annuities. Here, the customer makes a single upfront payment upon retirement, and in exchange, the customer receives a guaranteed monthly or annual payment throughout their retirement until their death.

These payments can either be fixed or inflation-linked.

The annuity fee reflects an implicit interest rate which is earned during the term of the annuity.

Let's take the example of an annuity which makes guaranteed annual payments of 20,000 pounds per year, and the policyholder is expected to live for 10 years.

If interest rates are currently 5%, the insurance company can sell the policy for less than the future payments of 200,000 pounds, since the annuity fee could be placed on deposit and earning an interest rate of 5% until the payments are made.

In fact, the insurance company can price the annuity at 154,435. That's the present value of all the future annuity payments discounted at a rate of 5% over the 10 years.

The insurance company can then invest the upfront annuity fee in the market and generate an investment return of, say, 7%.

This is a 2% spread over the interest rate, which reflects their profit.

The second type of spread product is a whole life insurance policy.

These are popular life insurance products in the US, and although it sounds initially like a term life insurance product which pays out on the death of the policyholder, the way in which it's structured is very different.

Here, the customer makes fixed regular premium payments, but these payments act a bit like a savings account with the insurance company.

The insurance company credits the account with interest each year and deducts the cost of providing life insurance cover to the account as well. The resultant balance reflects the policy's cash value.

If the policyholder chooses to withdraw from the policy, known as surrendering their policy, during their lifetime, they receive this cash value net of any early surrender fees, and the policy is then terminated. Alternatively, the policyholder can continue to hold the policy until death, at which point the guaranteed death benefit is paid using as much of the cash value as is available. In effect, a whole life policy acts like a term life insurance policy combined with a fixed savings component.

From the insurance company's perspective, the insurance risk is lower because of the cash value which builds against the guaranteed death benefit.

And instead, most of their risk is on the investment side.

So the insurance company generates a profit by investing the premium in investments which generate a return in excess of the interest credited to the policyholder, and that's their investment spread.

The third type of spread product is a participating life insurance policy, and these are very popular insurance products in Europe.

They're similar to a whole life insurance policy, as they also provide a guaranteed death benefit and a cash value for the policyholder.

But unlike a whole life insurance policy, the insurance company awards the policyholder bonuses or dividends based on investment returns on a specific pool of investments or the profits of the insurance company.

Note that if the policy participates in the profits of the insurance company, this is often referred to as a with-profits policy.

The bonuses or dividends can either be paid direct to the policyholder or can be allocated to the policyholder's account, or can even be used to increase the death benefit in the policy.

Therefore, the term participating policy refers to the fact that the policyholder is participating in the investment returns on underlying items. In effect, participating policies act like a term life insurance policy with an investment product component.

However, the policyholder does not choose the investment directly, and the insurance company controls the timing and level of bonuses, so the insurer bears the investment risk.

Therefore, the insurance company aims to generate a return in excess of the amounts credited to the policyholder, which is again their investment spread.

It should be noted that participating policies vary greatly by country. Firstly, in terms of the nature of the participation.

This can either be participation in the profits of the company or participation in a specific investment fund.

Secondly, in terms of whether the participation is discretionary or contractual.

Policies can either allow the insurance company discretion in the dividends received by the policyholder, which is the case for with-profits funds and UK policies, or they're allocated to the policyholder on a mandatory basis, which is the case in German life insurance, where at least 90% of the investment returns must be allocated to the policyholder.

Also, some policies have a contractual requirement to allocate all realized investment returns to the policyholder, therefore allowing the insurance company some discretion over the timing with which investment gains are realized. And this is the case for many continental European policies.