CU Endowment Advice Please

lolly1963

Hi,
We have a CU endowment which m considering surrendering, Our mortgage we switched 8 years ago and have been overpaying. Our balance is slightly less than the Endowment Surrender value.
Low cost endowment started September 91,Maturiry date 11 September 2011
Sum assured £50000
Basis sum assured £18950
Total Bonus attatching £8591.37
Premiums £124 monthly
These details were correct at 5 October 2006
Norwich Union surrender value is apx £24k but have been offered £27500 via alternative company.

Our idea is to pay off the mortgage early and save for the next 5 years.
Is this a good choice do you think. I think we have already made our minds up,but after reading some other queries with these policies we are having doubts.
I know the market is picking up now, but the last letter we had was,
4% Projected Payment £35,800 Target amount £50k Shortfall £14,200
6% £40,000 shortfall £10,000
8% £44,900 shortfall £5,100
This is showing as a red alert as at 21/09/06, but also there is the built in price promise. Couldnt get any help with NU when trying to decide what to do.
ANyone any advice please as you understand the policies better than the Mr and Mrs Average.
Many Thanks.

EdInvestor

lolly1963 wrote:

Norwich Union surrender value is apx £24k but have been offered £27500 via alternative company.

This reflects the fact there is a with-profits orphan assets windfall due on your policy in 2008.

4% Projected Payment £35,800 Target amount £50k Shortfall £14,200
6% £40,000 shortfall £10,000
8% £44,900 shortfall £5,100

If you surrendered the policy now and put the money on deposit @4% also paying in the premiums to maturity you would expect to get 37,433 and 39,075@5% (if you used the money to pay off the mortgage) so something in between if you did a combination of both.

These policies are expected to make 6%, so you should get a bit more if you stay and with the windfall now likely on top, I'd have thought probably tips the balance is favour of sitting tight.

lolly1963

Hi,
Thanks for your reply.
I am worried though that it might not project the amount suggested as they are still saying the policy is on red alert. Are they trying to frighten us?
I was thinking of saving on the £7000 in premiums that it would cost to keep running, plus adding the interest on the one account that is left then at least my future returns would be guaranteed.
What do you think? I am looking at future security with our investments.
Many Thanks

EdInvestor

Of course it will still make a shortfall on the original target amount, but that's not relevant any more as you have switched to a repayment mortgage.There will a shortfall on the target amount if you switch to cash as well.

You know you will get this guaranteed amount if you stay until the end:

Basis sum assured £18950
Total Bonus attatching £8591.37

Total : 27,541, that's the minimum you will get, plus whatever guaranteed bonuses they add over the next five years plus whatever terminal bonus ( more than 12k at 6% growth, which is reckoned as reasonable for this fund).

As your mortgage is covered either way, you have a bit of room for manoeurve.I'd suggest hanging on for the windfall and letting it go then if you feel the performance is still below par.

lolly1963

Hi,
Yes, i see i cannot lose either way really, but could be worth the gamble to stay with it.
Will have to talk to hubby now, as i thought we had made our minds up to surrender and thought i had done all the homework.
The only thing is, there is nothing guaranteed about future payouts as we all know anything is possible in this industry, and i am a person who likes to feel 'safe'. I was thinking of saving £10k a year for the next 5 years, that way physocologically we would still have £50k at the end of the term.
Swings n roundabouts springs to mind here.
Many Thanks for your advice and much to think about.

dunstonh

Couldnt get any help with NU when trying to decide what to do.

They arent allowed to advise you. Thats the same with most insurance companies now. They got rid of all their advisers to due increasing costs. Now they can only give information. They cannot give opinions or advice without breaking the rules.

but also there is the built in price promise.

The promise is not included in the projections. NU will cover the shortfall upto an amount of £5000. So if the 8% figure came out correct, then the policy will end up £100 short on maturity.

The CGNU fund has been performing quite well. For the last few years, the few I have in there have seen growth in excess of 10% p.a. Mostly on the terminal bonus.

Does your bonus figure include both terminal bonus and annual bonuses or just annual bonuses?

EdInvestor

lolly1963 wrote:

The only thing is, there is nothing guaranteed about future payouts as we all know anything is possible in this industry, and i am a person who likes to feel 'safe'.

I know it's bad but AFAIK there are no instances of people ( not even at Equitable Life) not being paid their policy's guaranteed value, as long as they stay to maturity.

Oh and BTW, don't forget the free life cover included in the policy.

lolly1963

Hi Dunstonh,


The bonuses attatching to the policy are the yearly ones.
Cheers

EdInvestor

The surrender value will normally include terminal bonus amount earned so far.

dunstonh

Depending on where you get the information, NU will show it with or without terminal bonus included.

I have just looked at an NU statement for one of my clients and the projections do not include any accrued terminal bonus that may already exist on the plan. They project from the guaranteed figure which is the guaranteed sum assured plus annual bonuses.

This is quite typical with conventional with profits plans and can heavily understate the real position of the endowment. For example, in your case, 6% p.a. return will give you £40,000. However, if you had a £6000 terminal bonus, you will really get £46,000. Plus you will get another £4,000 under the NU promise giving you £50k. So, your projection says £40k at 6% but you would really get £50k.

Its a limitation and flaw of the projection system on conventional with profits plans. Whilst its not a problem with poor quality plans, it can heavily understate NU and Pru plans.

lolly1963

Hi,
No mention of any terminal bonus included in any of the figures.So on the whole this policy seems quite good doesnt it?
This has made the decision to cash in even harder now.
They have painted such a poor picture with this red alert business, which quite honestly has frightened me each time i have received one.
I wish they could tell it more like it is, after all its our money and when you try and get the correct advice from them, it is just so difficult.
Many thanks for your input.