"A with-profits scheme offers valuable life protection but the best feature is that the annual bonuses, the `profit' attached each year, cannot be taken away," says Fre Mesbah of BP Sanders, a firm of independent financial advisers. "And you will have a fixed point in time when the policy matures, giving you the proceeds free of tax."
In a with-profits policy, your money is invested in a variety of assets including shares, property, gilts and cash. The insurer makes a conservative assumption about the long-term growth needed to cover the death benefits attached to the policy. This "basic sum assured" is the guaranteed minimum sum you will be paid on maturity or in the case of your death.
In reality, expectations are higher than the 2 or 3 per cent annual growth pencilled into the calculation. If the fund generates bigger returns, the extra is put aside to pay for an annual bonus for all its investors.
Not all the annual profit is shared out. Some is held back to make sure bonuses continue in lean years. But at the end of the contract term investors get a "terminal" bonus, which should reflect the excess profit accumulated over the years.
Traditional with-profits en-dowments are very expensive, largely because most insurers take their charges upfront. A lot of this goes to pay commission to the salesman who sold you the endowment. More go-ahead insurers, including Standard Life, now have their charges spread over the policy's life.
It is also possible to save on charges. Instead of pocketing the commission some advisers levy a flat fee, for example pounds 75 in the case of Chartwell Investment Management. They operate on an execution-only basis, meaning they give no investment advice. Some firms are better at managing with- profits funds than others, and the disparity between good and poor performers can amount to thousands of pounds at maturity. Magazines such as Money Management have regular performance surveys on endowments.
n Contacts: BP Sanders, 01442 876333; Friends Provident, 01722 413366; Standard Life, 0131-245 0178; Chartwell, 01225 321700. To find an independent adviser, call IFA Promotions on 0117-971 1177.