As emphasised earlier, the choice of company for a with-profit policy is a good deal more important than in the case of pure term or FIB policies. Historical results show that, over a 25-year term, maturity values of with-profit policies have varied by as much as 36%. A managed 39 in 1992 paying £1110 a month over 25 years could have received as much as £17,300 or as little as £14,800 in 2013 at maturity of a 25-year with-profit endowment.
Many people are puzzled and even dismayed by this sort of disparity. It arises as a result of two main factors, both of which are worth looking at more closely than we have done so far.
The prime determinant of the amount you receive at the maturity of a with-profit policy is the skill of the investment managers of the life insurance company you have chosen. It is their job, in conjunction with the company's actuaries, to maximise the return from the investment of funds for the benefit of policyholders. In doing so they must take account of the likely pattern of future claims so that there is always ready money to meet them without having to sell off investments at an unpropitious time.
They must also assess the current prospects for the major investment sectors into which they put money: shares, fixed-interest investments and property. If they put too much into one sector which then fares badly compared with the others, the returns to the policyholders will be lower than they might have been. On the other hand, they are dealing with very large sums of money - often tens or hundreds of millions of pounds - and they cannot simply liquidate all their property assets or shareholdings, even if they wanted to.
To a large extent they are "locked in" to substantial shareholdings and property investments, and their normal practice is to make investment decisions on a long-term basis, not with the aim of taking a quick profit.
A feature of most endowment policies today is the availability of options to increase the sum assured, without medical evidence. A few companies still include limited options without charge, but the majority now charge a small extra premium. In most cases this amounts to only 1 - 2% of the annual premium. A typical set of options on a 25-year policy would be the following:
1. Within the first 15 years the policyholder may exercise five options.
2. Each option (and no more than one option) may be exercised in one of five consecutive three-year periods.
3. The maximum... see: Endowment policy Options