What you Rercieve

What their investment management comes down to in practice is therefore the adjustment of the proportions of the total fund invested in different sectors in accordance with their view of prospects at the time. Since most companies have a substantial excess of income over claims (that is, they are expanding, taking in more money from new policies each year than they are paying out on old ones), they have always got money to invest.

By choosing the right sector to invest their new money in each year, they can therefore over a period of years improve on the average performance of any one of the three main investment sectors. Since fixed-interest investments (largely consisting of Government securities) can, unlike shares or property, easily be bought and sold in large quantities, they also have considerable scope for manoeuvre in taking advantage of fluctuations in interest rates. They may sell their fixed-interest stocks when a rise in interest rates looks probable, take temporary advantage of high short-term interest rates on deposits, and reinvest in longer-term gilt-edged when a fall in interest rates looks likely.

Over a period of years, these decisions, like compound interest, add up. They can easily account for a disparity of 3% compound per annum in overall fund performance, one company's funds doing 11/2 % p.a. better than the market averages and another 11/2 % worse. Over a period of 10 years, for example, the disparity might be between growth at an average 5.6% p.a. and growth at an average 8.6% p.a.: £111,000 invested at the start of the period would be worth £111,708 and £12,261 respectively at the end of it.

The other main factor is the proportion of the company's income that is taken by expenses. Head office staff, investment managers, actuaries, administration, computers, marketing and commission, regional offices and salesmen are all costs that have to be met out of the income obtained by way of premiums and income from investments.

The higher the proportion of income taken by expenses, the less there is to invest for policyholders, and so maintaining efficiency and keeping expenses down is a major factor in producing good results for policyholders over long periods.

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Return at Maturity

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... see: Return at Maturity

Of interest