A with-profit checklist

ENDOWMENT policies are out of fashion. In recent years with-profits bonus rates have been falling. The main reason for this is that inflation and interest rates are lower than they used to be.

But while annual bonuses may be lower than they were in the late 1980s, real annual returns - that is, returns minus inflation - have largely been unaffected.

The recent performance of the stock market has also enabled with-profits funds to pay out higher terminal bonuses. The life insurance industry claims that the real return on many endowment policies has risen.

But some policies have done better than others. "The low interest rate and inflation environment has hit 10-year policies harder than 25-year policies," says Ian Harper of General Accident. "Most of the term of a current 10-year policy has been characterised by years of low inflation so it is having a bigger effect on total returns here than on longer policies."

Lower annual bonuses are not necessarily a bad thing. In order to pay these guaranteed bonuses, the life company has to invest in money and gilts. The lower the guaranteed bonuses, the less money has to be invested in these assets and the more money there is available to invest in equities, which over the long term have given better returns.

So do with-profits endowments still offer good value to investors? The endowment industry says yes, and maturity values back up this assertion.

However, a closer look at the figures shows that 15 and 20-year policies have not stood up as well as 10 and 25-year ones, which are the most commonly analysed.

Investors need to look closely at charges as these can be high. You should be prepared to hold your policy to maturity, otherwise the pay- out can be disappointing.

There is plenty of choice but the difference between the best and worst performers can be many thousands of pounds. Patrick Murphy, of Tribune independent financial management, suggests looking at the following aspects:

q Financial strength - a strong life insurer is likely to have more money available in its with-profits fund to invest in equities.

q Flexibility - find out what happens if you have to cash in your policy before maturity. Many firms only pay a terminal bonus if you keep the policy to maturity, others are more flexible.

q Charges - how high are they, and are they spread through the life of the policy or front-loaded?

q Past performance - while this is no guide to future performance, many people prefer to invest with a company that has consistently done well. Money Management magazine regularly reviews the performance of with-profits funds.