Should I cash-in our Standard Life Homeplan Endowment?

NickButcher

Hi guys

We're thinking of cashing-in our Standard Life Homeplan endowment and sticking the dosh into ISAs.

It started in March 1994 with the the intention of covering £40854 and will mature in March 2019. I'm gonna buzz them tomorrow for a surrender value but, as of last March, the value was £14478.07 including a final bonus of £1995.19.

The monthly contribution is £61.26 and the life cover (only on my life) for 2010/11 was £155.76. We don't really need this cover as we're well-insured elsewhere and through our jobs.

The last forecasts were: 22600/25700/29100 (these numbers go down every time we get a statement!) and the MEP estimates were £2061 - £3093. I've read the explanation of how the MEP will be calculated but I reckon a Nobel Laureate would have trouble unravelling that.

Thanks in advance for any advice.

NickButcher

Surrender value this morning is £15578.18

dickobrien

Hi did you ever get any further with that, I am in the same boat, or would there be any possibility of compensation
!!!!!!

jamesmorgan

They key calculation in determining whether to cash in an endowment early is to look at the current surrender value and compare it with the projected payment at the end of the policy (including any mortgage endowment promise). You then need to work out what investment return is required to get from one to the other taking into account future monthly payments (net of life insurance premiums). Clearly the big unknown in this calculation is the projected end of term value. The endowment companies are forced to use the government supplied investment return rates so have no real correlation with the actual assets that the fund is invested in - for example, Standard Life have very little invested in shares, most is in fixed interest. However, you can get a reasonable estimate by assuming that the current annual bonus remains the same for the rest of the policy and that terminal bonus rates are the same as today. For Standard Life the current terminal bonus rate is 13.4%. This has been steadily rising since May 2010 when it was 5.2%.

For my own SL policy as way of example

Current surrender value: £18073
Projected value: £21294 (in 2 years time)
MEP value: £2500 (mid point of estimates)
Monthly payments: £46 (net of life insurance payments)
Rate of return required: 11.6%

So unless I can achive 11.6% (after tax) from an investment, I am better off keeping it with Standard life.

If you are not sure how to do this calcuation, the following spreadsheet cells show how to do it ( the formula in the 11.6% cell is XIRR (money-range, date range))

...............18073 18/10/2012
.............46......552 18/10/2012
............ 46......552 18/10/2013

................-£23,794 18/10/2014 11.6%

Out of interest you can also do a similar calculation to see how much investment return the policy has generated since it started. For my policy (started in 1989) this works out as 4.5%. This is probably better than I could have achieved from a savings account and is roughly equal to the mortgage interest rate. In theory if endowment growth = mortgage interest rate, then an endowment mortgage is neutral in comparison to a repayment mortgage.

Of course, the policy will have a significant shortfall, but that is because the monthly payments were too low to achieve the target unless growth rates were over 7%/annum.

opinions4u

MEP.

Mortgage Endowment Promise.

Don't underestimate the value of this.

jamesmorgan

opinions4u wrote: »

MEP.

Mortgage Endowment Promise.

Don't underestimate the value of this.

As OP stated you probably need to be a Nobel prize winner to understand it. It is basically an 'aspiration' by Standard Life to pay some additional money to policy holders to make up potential short fall in their policies. When they demutualised they toned down the 'promise' to only pay what they could afford. They provide a current range for the payment, but stess that the final payment could be higher or lower (or nothing). This makes it about as reliable as the final bonus.

The key point is that the MEP is not transferable, so if you sell a SL endowment on the third party market, the new owner is not eligible to receive it. It is probably for this reason that few SL policies seem to appear on 3rd party auction sites. Without the MEP, I estimate that I would need to make about 5.5% growth to achieve the final policy value (ie it is worth considering).