2 unusual questions about endowments

BlondeHeadOn

Unusual in the sense that I've done a search of this forum. but I can't find that anyone else has asked these!

This probably means that they are numpty-type questions that are blindingly obvious to everyone else - BUT I want to know the answers, so please bear with me....

Numpty Question 1:
We've had the 'red alert' letters for our endowment policy, suggesting that we might like to raise the premium each month to make up the shortfall. We haven't taken them up on this kind offer (good money after bad has always sprung to mind!), as we are no longer relying on this endowment to pay off the mortgage and the capital balance is now less than half the original amount anyway.

However, it has suddenly occurred to me to check that this does not affect the life cover and CI payouts of the endowment, should we ever need them. The sum assurred in each case is for the full original cost of the mortgage, but are the LI and CI parts of the premium unaffected by the poor performance of the endowment bit? Also, is it okay for the LI and CI bits that we have never increased the premiums?

I've always assumed they would be okay - and can't find anything to say otherwise on the agreement papers I can find - but want to check I am not missing something here!

Numpty Question 2 (this one is more from curiosity):
Is it ever possible for an endowment to go back into 'green' again if the financial circumstances allow? For example this endowment is apparently unit-linked, and on this forum I have learned (I think!) that now is maybe a good time for these policies as the units can be bought very cheaply at the moment. Does this mean that the projected values may increase next year, even in this uncertain economic environment?

By the way, I am not for one minute thinking that our endowment has a cat in hades chance of getting back into the green (or is it black?), but I'm just interested in the theory ....


All helpful replies gratefully accepted!

skintandsad

Hi Blonde.

I am not an expert on endowments, but my little bit of understanding as to how they work is as follows:

There are two elements to an endowment policy.
1) the life cover (to include CI if appropriate)
2) the investment

Life cover is unaffected by investment - so, if investment is a bit "dodgy", ie units badly performing, life cover is not affected - the life cover is a guarateed payout on death (subject to t&c's of course).

When they buy the units for the investment part, these can go up and down, as we know. They would have given a projection when you took out the policy, with their "educated guesstimate" of what it would be worth in 20/25 years time (or whatever period it was taken over). If things are performing badly - they will warn you - but, things in the stockmarket can and do change, and it might all be alright in the end (perhaps!), but on older policies, they usually overestimated final value - hence the warnings you are getting.

I hope this makes sense !

I'm sure someone cleverer and more clued up than me will be able to provide a more in depth and technically correct answer!

BlondeHeadOn

Good news about the life cover - thank you!

Re the endowment going up and down - I know the theory of that, but in my experience they have only ever gone down in value!

My question really was: has anyone ever had (or know of) an endowment that went to red and then turned out okay in the end?

opinions4u

Some endowments have been flagged red and recovered.

Unfortunately in the current climate of 33%+ off the value of the FTSE and large falls in worldwide stockmarkets, I wouldn't expect a repeat recovery.

GGGG

BlondeHeadOn-
You've answered your own questions!
Q1) It's right that the Life & Critical Illness parts of your endowment are guaranteed payments should you die or be diagnosed with a condition specified in the policy schedule; a part of the premium you pay each month is what funds this protection. However, many providers of this type of cover offer "Reviewable" as well as "Guaranteed" premiums, so you should check the small print to see which applies to your policy.
Q2) It is theoretically possible that your policy may be "green" at some point in the future; with a unit-linked investment, the fixed "investment" element of your monthly payment buys units at the market price (less the charge for managing the fund), so in simple terms, when the Stock Market is high, you buy fewer units at a higher price, & when it is low (as at present), the same money buys MORE units. The theory is that when unit prices go UP, (as they will at some point) the ones you bought (more of) at the lower price increase the value of your investment.
In practice, whether the endowment ever reverts to "Green" cannot be guaranteed, as to a large degree it is dependent on market conditions at the time the policy matures or you choose to redeem it, & it is this uncertainty which most sensible people avoid by having a Capital & Interest repayment mortgage. Under this, if you make all your contractual payments when due, you are guaranteed to pay off your mortgage. Also, there is generally (but not in all circumstances) little difference in cost between a Repayment mortgage & an Interest-Only backed by an investment.

Hope this helps...?

BlondeHeadOn

GGGG wrote: »

BlondeHeadOn-
You've answered your own questions!
Q1) It's right that the Life & Critical Illness parts of your endowment are guaranteed payments should you die or be diagnosed with a condition specified in the policy schedule; a part of the premium you pay each month is what funds this protection. However, many providers of this type of cover offer "Reviewable" as well as "Guaranteed" premiums, so you should check the small print to see which applies to your policy.
Q2) It is theoretically possible that your policy may be "green" at some point in the future; with a unit-linked investment, the fixed "investment" element of your monthly payment buys units at the market price (less the charge for managing the fund), so in simple terms, when the Stock Market is high, you buy fewer units at a higher price, & when it is low (as at present), the same money buys MORE units. The theory is that when unit prices go UP, (as they will at some point) the ones you bought (more of) at the lower price increase the value of your investment.
In practice, whether the endowment ever reverts to "Green" cannot be guaranteed, as to a large degree it is dependent on market conditions at the time the policy matures or you choose to redeem it, & it is this uncertainty which most sensible people avoid by having a Capital & Interest repayment mortgage. Under this, if you make all your contractual payments when due, you are guaranteed to pay off your mortgage. Also, there is generally (but not in all circumstances) little difference in cost between a Repayment mortgage & an Interest-Only backed by an investment.

Hope this helps...?

Very Useful information, thank you! I will check again the wording of the life and CI but of the policy, to make sure I haven't missed anything.

Fortunately we are not relying on the endowment to pay off the mortgage now anyway - we have already 'overpaid' off over half of the capital balance, and now only have £30k left. We have a very useful flexible tracker with no penalities for overpayments, so it's not all bad! We also will be able to make another lump sum payment shortly, so plan to have it paid up in 4 years (7 years early).

I was thinking about surrendering the endowment, but have been advised that it's probably worth waiting a bit (because of the unit-linked aspect) - hence that part of the question.

Thanks again.