In recent years, with-profits life assurance has been tarred with the brush of hidden charges and relatively dull performance, and overtaken in the promotional stakes by PEPs and other products. But endowments can still have an important role in long-term investment.
Equity-linked investments carry no guarantees. They will go up and down in value according to the vagaries of the stock market. With-profits endowments, however, do give a minimum guaranteed return - the sum assured - providing premiums are paid for the duration of the policy.
Life companies invest their policyholders' premiums in a mixture of investments, including shares, fixed interest and property, to ensure they meet the guarantees and maturity values on the policies.
The profit they make above this is distributed to the with-profits policyholders in the form of bonuses. Every year they declare what is known as a reversionary bonus. This is expressed as a percentage of the guaranteed sum assured (the life assurance element) and any previous attached bonuses. Once declared, this bonus cannot be taken away.
They also declare a terminal bonus, paid on policies maturing that year. This reflects the excess profits earned over the period, including those from policies that have been surrendered or lapsed before maturity. This is a sizeable amount and depends on the term of the policies. For long term endowments of 25 years or more, it will often more than double the sum assured and its attached bonuses. This bonus can vary considerably, from 12.5 per cent for 10-year policies to 125 per cent for 25-year endowments. It is this terminal bonus which has fallen in recent years, reflecting the lower rates of return earned by insurance companies as inflation has fallen.
But do remember, with-profits policies are only for those who can keep paying the premiums. They carry severe penalties if surrendered early, often not even returning premiumsn