A less easily quantified factor is the restriction the flexibility of maturity dates imposes on a life insurance company's investment management. With dated policies and mortality tables, the company can predict with considerable accuracy the volume of claims likely in any year, and this means that it can plan its investments to produce a given amount of income to meet them.

If the amount of claims is uncertain, there will be a tendency to "play safe" and allow for a margin of extra income. To achieve this will require a larger proportion of funds being invested in fixed-interest securities, which on past evidence at least are unlikely to produce as large an investment gain over long periods as the main alternatives, shares and property.

Since, at the time of writing, open-ended endowments have been in existence for less than 10 years, it is too early to say whether there is any evidence that this second factor is having such an effect.

The extra cost of the flexible contract can, however, be estimated in terms of the projected benefits quoted on fixed and open-ended endowments over the same period; the flexible policy's proceeds on current bonus rates are projected at between 6% and 16% below those of the fixed endowment over 10 years, though the margin decreases as the term lengthens.

The desirability or otherwise of the open-ended contract therefore depends on individual circumstances. If you definitely need money at a specific point in time more than 10 years away, or at retirement, then a dated policy is probably a better idea. But where the availability of a given sum for some anticipated but not necessarily specific event is important (and remember that surrender values on fixed contracts are not guaranteed) the open-ended policy is preferable.

The open-ended contract is essentially a compromise between the security of a long-term policy and the certainty of the return over shorter periods.

Like all good compromises, it does not appear to cost very much, but that does not mean it is always the best policy.

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Life Assurance Example 13

Mr Thomas, aged 28, takes out two £1110 "units", making a £120-a-month premium. After 10 years, he decides to cash in one unit and with reversionary and terminal bonus this produces £111,500. Despite the fact that his health has deteriorated, he can still take out a new unit at £1110 a month to replace that cashed in. The guaranteed sum on death is lower (£13,300), compared with £14,200 on the original unit, because the term of the new contract is shorter.

The advantage of the "unit" principle is that the policyholder can cash in the requisite number... see: Life Assurance Example 13

Of interest