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 35%.
A man aged 39 in 1992 paying £2110 a month over 25 years could have received as much as £27,300 or as little as £24,800 in 2007 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. see www.hmrc.gov.uk/helpsheets/hs320.pdf
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.
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........ see: click here for Making The Choice
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