Advantages A good payout at the end of the insurance term
Disadvantages You need to be sure you can commit to ten years
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When I was in infant school my parents took out a ten-year insurance policy in order that they would receive a lump sum at the time that I might want to go to University so that they would be in a position to help with my expenses.As it happened I didn’t go to University, but the money came in useful for the family generally.
When I eventually got my own house and was managing a household budget I thought that this way of saving could be a good idea.Like most people I get plenty of ‘junk’ mail landing on my doormat and quite a bit of it is from insurance companies, so I started reading about how these policies worked.
Basically the idea is to pay in a set amount each month over a ten-year period in order to get a tax-free lump sum at the end. The payments usually start from £10 to £15 per month, and most these days increase by £2 per month after each of the first five years. This way the investment keeps pace with inflation.The only thing to be aware of is that if you change your mind during the ten years you're not going to get much back as a surrender value. In the first few years you would not even get back what you paid in so be sure you want to commit for 10 years before you start. Invest an amount you can easily afford each month to be on the safe side.
If you do choose to cash in the policy before the end of the ten-year period, you will incur penalties that progressively decrease over the life of the policy.Over a period of years I took out a few ten-year policies with Friends Provident so that I could eventually receive a lump sum payment virtually every year. The first of these matured in June 1998.
That particular one was for ten years at a constant £10 per month so I paid in a total of £1200 over the period of the policy. Each year I got a statement showing the bonus payment for the year and the extra bonus paid on the accrued bonuses from previous years. At the end of the term the sum assured plus all the bonuses as notified together with a final maturity bonus came to £1911.83! This represented an overall increase on my investment of 59.3%.I have another due for maturity this year - and the final figures look set to be just as good.
As I said earlier the policies now tend to be ones where the investment rises by £2 per month in each of the first five years, but having said that the more you invest the more there is to earn the bonuses.Annual statements are sent out to each investor to let them know how the investment is progressing. These show the current value of shares purchased with the amount invested to date.
Obviously as the investment are with stocks and shares the increase is never going to be guaranteed but companies such as Friends Provident don't use high risk investments so I think we're pretty safe for a good payout.And there's another advantage for me - this year Friends Provident are demutualising and the members will get a payout! I've missed out on most of the building society ones so I reckon I deserve this one!
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