Surrender endowment policies now ?

cgoode

I have two standard life policies to cover my mortgage - one maturing Oct 08 and the other Feb 2010.

The balance on my mortgage is £25.5K which needs to be repaid in 2010.

The surrender values of these policies today is £21k (a difference of £4.5K between surrender values and what I owe).

The cost to keep these policies going in terms of the monthly payments to SL and interest payments to building society between now and 2010 is £5.5k.

If these policies continue until maturity and SL only pay the minimum guaranteed amount, I will have a shortfall of £5k but on top of that will be the £5.5k it has cost me in monthly payments to the lender and SL. Total cost to me would be £10.5.

If I surrender the policies now, I will have a shortfall of £4.5k - but it is going to cost me £5.5 to run the policies to maturity anyway.

If they grow at 3.75% I will still have a shortfall of £1.7 - plus the £5.5 - TOTAL COST TO ME IS £7.2k.

If they grown at unlikely 7.25%, they will just about cover the outstanding amount of the mortgage - but it has still cost me £5.5 to get to this point in payments.

Seems to me that I should surrender the policies and have a shortfall of £4.5 and be done with it, otherwise I run the risk of it costing me more - anything up to a total amount of £10.5k should only the guaranteed amount be paid.

Or am I missing something here - haven't got round to speaking to my FA yet.

Chris

dunstonh

Standard Life projections do not include terminal bonus accrued to date or the mortgage promise value. So, you need to ascertain what those values are before you can make any decision.

For example, a £2000 terminal bonus would put you in a surplus position at 3.75% and would result in no mortgage promise value paid as you hit target.

EdInvestor

Post some info about the policies

Guaranteed sum assured
Declared bonuses
Surrender value
Monthly premium
Maturity date
Maturity projections

Interest rate payable on mortgage

cgoode

I have two policies.
One matures Oct 2008 The other Feb 2010
Guaranteed sum assured 5430.00 4,163
Declared bonuses 6481.00 4,335
Surrender value 13,310 8,363
Monthly premium £20 £17
Maturity date Oct 2008 Feb 2010
Maturity projections £14.4k £14.8k £15.2 £9.6k £10.1k £10.6k
3.75% 5.5% 7.25%
Target amount £15k Target £11.5k
Interest rate payable on mortgage 6.74 with Nationwide, costing £144 a month on outstanding amount of £25.8k.

Standard Life currently paying 21% final bonus.

On the policy maturing Oct 2008, minimum amount they will pay at maturity is £11.9k Bonus added for this year was £45. If that continues to 2008, total will be £12k and there MAY be 20% to add to that or whatever the final bonus is at the time (going by history since 2004 it will be 5% if I'm lucky!! (or that's how I understand it?)

On the policy maturing 2010, minimum amount they will pay at maturity is £8498 - bonus added this year £32.

Based on these figures and final bonus of 20%, the most I will get is about an extra £4.5k for the final bonus - the total will just about pay off my mortgage - but to get to this point it is still going to cost me £5.5k in insurance premiums and interest. So if I surrendered policies now, it will only cost me £4.5 in the shortfall. I doubt they will pay anything more than a 20% final bonus ??? Of course, if they did pay more than 20% at maturity, then I may have lost a bit of money. How likely is this I wonder?

cgoode

Sorry- the formatting went wrong. Here is information again

Guaranteed sum assured 5430.00
Declared bonuses 6481.00
Surrender value 13,310
Monthly premium £20
Maturity date Oct 2008
Maturity projections £14.4k £14.8k £15.2 at 3.75% 5.5% 7.25%
Target amount £15k

Guaranteed sum assured 4,163
Declared bonuses 4,335
Surrender value 8,363
Monthly premium £17
Maturity date Feb 2010
Maturity projections £9.6k £10.1k £10.6k at 3.75% 5.5% 7.25%
Target amount Target £11.5k

chuckles1066

cgoode wrote: »

Sorry- the formatting went wrong. Here is information again

Guaranteed sum assured 5430.00
Declared bonuses 6481.00
Surrender value 13,310
Monthly premium £20
Maturity date Oct 2008
Maturity projections £14.4k £14.8k £15.2 at 3.75% 5.5% 7.25%
Target amount £15k

Guaranteed sum assured 4,163
Declared bonuses 4,335
Surrender value 8,363
Monthly premium £17
Maturity date Feb 2010
Maturity projections £9.6k £10.1k £10.6k at 3.75% 5.5% 7.25%
Target amount Target £11.5k

it doesn't cost anything to get a quote from a TEP market maker as to how much you could sell your policy for

dunstonh

what are the terminal/final bonuses currently sitting on the plans?
what is anticipated mortgage promise value on the plans?

Neither of these are included in the projections so they do need to be known as any surrender or sale will see someone else benefit or you losing some of them.

Number 1 certainly has some as the surrender value is nearly 2k more than the current position. This one looks on track to pay a surplus on maturity.

Very similar position with number 2 but not be as by much. Surrender value is higher than current position suggesting a decent final bonus attached at this point.

EdInvestor

On the first one, if you surrendered it now and threw the lump sum at your mortgage, also upping your monthly mortgage payment by the 20 quid premium for the 18 months, you would end up with 15,067, just over the target amount.This assumes you don't need to replace the life cover, there are no mortgage redemption penalties and the mortgage rate remains the same.

I guess the risk is that you might get less than that if you stuck with the endowment.SL management says that payouts will continue to fall for some time.

EdInvestor

cgoode wrote: »

Maturity projections £9.6k £10.1k £10.6k
at 3.75% 5.5% 7.25%

With the second one, if you followed the same procedure above with the same assumptions, your return at maturity would be 10,848. This is higher than SL's top projection.

Of course over 3 years mortgage rates are likely to change, but it seems a little too early yet to be sure when they will start to fall thus lowering your return as you would be repaying at a lower interest rate.

In any case what is quite clear is that the premium you expect for taking an investment risk - as opposed to repaying a loan or saving in a deposit account - has disappeared.

dunstonh

Ed has totally ignored the final bonus and mortgage promise values and we all know SL projections dont include those and do understate the real position. We need to know what those values are otherwise it is all guess work.

EdInvestor

The surrender value includes accumulated terminal bonus up till now. As we know the final payouts at SL are still falling so the problem for the OP is that the TB amount he has now could go down.

It is always, in any case, "guesswork" with WP investments.

The only person who really knows how much people will get is the actuary with the envelope and the pen.