How do they calculate the growth rate on endowment policies?

RateTartExtraordinaire

Hello,

I'm hoping that one of you knowledgable MSE forum people will be able to help me understand my endowment better.

This week I received my annual statement of bonus payment on my endowment from The Pru. (It has a shortfall, but I'm dealing with it through overpayments on my mortgage)

The letter that came with it states the the Pru Portfolio Management Group are 'smoothing returns' on investments that they say they are doing at the moment 'to achieve medium to long term growth'.
So I tried to work out just how thinly they were spreading the returns. But I'm not sure if I'm working it out right.

Do they base growth on
a) the guaranteed sum assured + bonus payments. Or
b) payments made by into plan + bonus payments.

They never tell you the actual growth rate in the letters and it bugs me!:mad:

Occams_Razor_2

no one could tell you the methods they are using without knowing what methods and assumptions they are using.

i.e. you need to ask them

RateTartExtraordinaire

Hmm no easy answer then! I thought there might have been some market wide way of comparing growth between endowments.

I will ask them...
I'll post back here when I get their reply:)
thanks

kingstreet

Are you confusing growth rate with actual rate of return?

The growth rate is the assumption used to show what might be the value at the end of the policy term if premiums are maintained and that rate achieved each year.

The actual rate of return is the annualised effect of bonuses being added to the guaranteed sum assured and the payment of any terminal bonus at maturity.

Smoothing is one of the major benefits of with-profits investment (or it was). Each year, the profits in the fund are distributed as an annual bonus which becomes as "safe" as the guaranteed sum assured once it's added. A portion of the profit isn't included in the annual bonus. This is a kind of reserve which can be used to keep annual bonus payments steady without the need for fluctuations. Each policyholder gets a slice of these unallocated profits by the use of a terminal bonus payment at maturity.

Can you tell us what you are trying to work out and we'll see if there's another way of telling you what you want to know? I have a feeling you want the guaranteed sum assured plus annual bonus earned for that year compared to a percentage like an interest rate so you can see if the money is actually growing at a higher rate than it would in a savings account or other alternative?