Endowment policy - sell or hold?

Imnoexpert_2

My wife has a low start endowment policy - With AVIVA.

It has 4 years 7 months to run and has a surrender value (at present) of some £17,000. She pays £60 a month.

We don't need the money to pay off a mortgage, and we don't need the life insurance element.

For years financial advisers have advised holding because there was enough time for it to pick up. Recently her IFA has suggested cashing in. He has tried to sell it elsewher but nobody wants to buy it so any thoughts on if we should cash in, and what we should think about?

My hunch is to sell and I think in hindsight this should have been the advice several years ago.

saveonarola

I posted a similar query a couple of weeks ago. My situation is similar to yours, though I've got longer to go. Search forums for the thread 'Should I cash in my endowment?' It covers the major issues, I think. Post here after if you've got any thoughts. I'd be interested.

Stubod

Hi there,

..I also posted a similar question some time ago but did not get any real advice. Ours is a 25 year policy of £55 per month, current value about £20k, but with only 1.5 yrs to run. Like you we were advised that all the "bonuses" get left until the end, but the last update letter advised that there my not be any bonuses paid now!

I wish we had cashed it in a few years ago, but as we only have a year or so left we will probably let it run its course.

dunstonh

What is the mortgage endowment promise value? That is often the key thing that can swing a keep or sell decision.

Imnoexpert_2

Thanks everyone. I'm in the process of checking other sources and facts. I tried to find the terminal bonus rates on the AVIVA website but for some reason it seems difficult to find.

DunstonH thanks for your interest. Current Value (August 2010) was £20,710 Surrender value is £17079 (21/9/2010) and Sum Assured is £14448. Interestingly the target was £42000

Does this help? I could tell you what the projected value is if investments grow at 6% but I am older and wiser now and ignore these figures for the smoke and mirrors I know they are!

dunstonh

Does this help? I could tell you what the projected value is if investments grow at 6% but I am older and wiser now and ignore these figures for the smoke and mirrors I know they are!

No. we need to know what the Mortgage Endowment Promise value is. You get this added to the maturity value if it falls short. Aviva statements from 2001 and I think 2003 or 2004 show it. Sometimes its only a few hundred pounds but others have been seen at over £10,000. If you surrender/sell then you dont get that payment. Aviva do not go out of their way to tell you what it is. Hence why you have to refer back to old statements or get through to someone in their call centre who knows what the MEP is (many of their staff dont and deny any knowledge of its existence).

krislou80

hi kinda new from the forum....

Imnoexpert_2

I've done more research and read all the papers I have on the endowment and it is fascinating and more comlex than I naively thought. Reading dunstonh's various replies to people I picked up two very true themes 1 The answer depends on each individualcase and policy 2 You'll never understand everything.

I now know, but don't understand about the Mortgage Endowment Promise. I came on to post about this and well done dunstonh for pointing it out. This is more than AVIVA did when I phoned them yesterday or my IFA who advised me to sell the endowment.

I now know - and this may help others, and act as a check that I really do understand it better. When the endowment matures the sum you get comprises of
1 The sum assured (£144480)
2 The sum of the annual bonuses (currently £6230)
3 A terminal payment (unknown but 9% of the assured sum this year)
4 A Mortgage Endowment Promise sum

The MEP "we may make a top up payment... providing the investment return on our free reserves is sufficient" "If we believe that this is in doubt we will give you 3 years notice" "It is our intention to offer the promise....In current conditions this is likely to be the case "If that view changes we will give you three years notice"

The shortfall .....could be reduced by up to £8500 (maximum).

So this changes everything if my understanding is correct and there is a strongish possibility of getting an extra £8500 then instead of accepting the surrender and looking for roughly 2.5% annual growth over 5 years to beat the final figure it looks like holding onto it is a better bet.

I'm worried by the up to £8500, and obviously the annual bonus, and terminal bonus are in no way certain but what do others think?

Have I got this right and how should I approach my IFA who recommended surrender?

Thanks all - particularly dunstonh!

dunstonh

The MEP uses standard legal language in that it is not a contractual guarantee. So, words like "may" and "intention" are to be expected. However, Aviva have fully funded the MEP on the expectation of having to pay the full liability. So, unless they suffer some unforeseen catastrophe, you should be fine. The current position is that the MEP liability is not as high for them as it was two years ago and is lower than when it was introduced back in 2001. If they wanted to pull it, that have had worse periods that "could" have persuaded them compared to now.

With Aviva, I generally look at the lower projection rate and factor in the MEP. Aviva have the potential to exceed the middle rate but they dont seem to be as interested in With Profits as they used to be. So using the lower rate plays it safe.

Take the current surrender value on the one hand. Add the outstanding monthly endowment payments to it and call it value "A". Then take the low rate projection value. Add the MEP value to it and call it value "B". Whichever figure is the higher is the option you go with. Although there is more fine tuning you can do as that is a quick and simple initial check and doesnt take into account a potential need for life assurance for the remaining term (deduct the cost of replacement life cover from value "A" if you intend to replace life cover). If you are going to clear the mortgage with the surrender value now then you could add the monthly saving to value A as well. You can also factor in savings rates to value A for the remaining years if you are good with excel or have access to software (as many IFAs do). However, with rates low, it would only be fine tuning on a short term period and be of use if the gap is only small. If the gap between A & B is big then it wont make enough difference.

Imnoexpert_2

Many thanks.

Figure A is £20,703 and figure b is £31200. We don't need the life cover and the house is long sold.

I may get the spreadsheet on it to do fine tuning but it seems a no brainer. Keep the endowment.

To think my wife was on the verge of giving it up on the advice of the financial adviser. Close shave!

00ec25

is a MEP unique to Aviva only, or more specifically do Standard Life have one for their policies?