Endowment advice - make paid up or continue paying?

travel_freak

Hello,

I hope someone considerably more au fait with endowments can offer me some advice. I pay £60 per month into a Friends Provident endowment (with profits, I think). I originally took this out in 1989 when I bought a property but it is no longer linked to a mortgage/property as I'm renting now. I'm aware of all the bad press endowments have had but someone told me in spite of this it would be worth keeping going as it gives me life cover (only £42,000 though) and it would be expensive to buy a replacement plan when I buy another property.
I've just had a yearly statement and this year's bonuses are a paltry £17.75 - hardly justifying paying in £60 a month for!

I think the sensible thing(!?) would be to make it paid up but I'm not at all clued up on the risks/benefits side of doing so. Does anyone who knows more than me have any thoughts?

Thanks in advance.

dunstonh

With a conventional with profits plan, you get a guaranteed sum assured of around 1/3rd of the life cover amount. The annual bonuses are added to that. So when you look at your "paltry" 17.75, you need to remember the guaranteed sum assured. Also, did FP add any terminal bonus back in this year? The life companies have started upping terminal bonus rates a bit but leaving annual bonus rates low.

You must also remember that we have just come off the back of a stockmarket crash and the market, although recovering, has to yet to make up losses (at least as far as a with profits fund is concerned). The period following a crash is always going to have lower returns on a WP fund due to the smoothing effect these funds have.

EdInvestor

Hi travelfreak,

Can you tell us

1.The current surrender value ( ring up and ask)

2.When the policy matures

3.What is the value of the guaranteed sum assured plus the existing attached bonuses?

4.Is there any terminal bonus left in the policy, if so what % of the plicy value?

It's unlikely to be sensible to make it paid up, but it may be wise to surrender it and reinvest the money elsewhere.

If you can supply the above figures we can work it out.

dunstonh

If you going to get that information, it may be worth getting a projection as well. Although i havent seen an FP plan with errors (mainly as I havent seen an FP endowment for as long as I can remember), it is still worth checking the 4% projection against the guaranteed sum assured and annual bonuses to see if there is a conflict of information.

pengers

Travelfreak,

I have a Standard Life policy and like you thought it was pointless making the monthly payments when they paid out only £27 in bonuses. The important thing I discovered was the guaranteed sum assured is only guarenteed if you have made your monthly payments till maturity. I was told the guaranteed sum assured would be reduced by approximately one-fifth if I made it paid up. Cashing in seemed even worse. Standard Life still pay a terminal bonus (12%) - so might FP. Ask. My advice would be to keep going if you have just 4 years to go (2009)

clairville

Endowment advice
Thanks for all the advice as I am in the same position
Is it possable to take assurance company to the small claims court for the short fall

dunstonh

clairville wrote:

Endowment advice
Thanks for all the advice as I am in the same position
Is it possable to take assurance company to the small claims court for the short fall

There are no known cases of any doing it.

travel_freak

Many thanks for all the advice so far, which is much appreciated.

Editor, I've received some bumph in the post which I don't really understand! Anyway, I think I can reply to your questions:

1. Cash value (think this is the same as surrender value?): £12,348.44.

2. Matures in September 2014.

3 and 4. Not sure about this as the bumph quotes so many different figures. Here goes ...

"What value is the paid-up sum assured
The paid-up sum assured would reduce to £8,631.00. Declared bonus will reduce to £6,703.40. New bonuses added to the policy will be on £14,574 plus any declared bonus up to 5th April 2005 and on £6,631 plus declared bonus thereafter."

Projected cash value at 27/9/2014 assuming premiums continue, at 4% = £24,000.

Projected cash value at 27/9/2014 assuming premiums cease on 27/3/2005 at 4% = £16,500.

Total amount payable on death is £42,000 but I understand this cover would cease if I make the policy paid up.

I'm just wondering if there's any point continuing to pay £60 a month until 2014 or if that's just throwing good money after bad and maybe I'd do better to put that £60 a month into a savings account? Any advice gladly received.

Thanks again.

EdInvestor

Hi travel freak

The paid-up sum assured would reduce to £8,631.00

Reduce from what? That's the figure I need, ie what is it now?Possibly on your last annual statement?


Declared bonus will reduce to £6,703.40

Again, reduce from what?

travel_freak

Hi Editor,

Sorry - I don't find FP's letters easy to follow at all.

Looking at the yearly statement from 2004, here's more information which might mean more to you than it does me...

Guaranteed amount for bonuses: £14,574
Bonuses added to your plan in previous years: £7,038.49
New bonuses added to your plan this year: £17.75
Total of guaranteed amount plus all bonuses: £21,630.24
Bonus rate on guaranteed amount: 0%
Bonus rate on existing bonuses: 0.25%
The final bonus rate is not shown on the bonus statement because unpredictable investment conditions mean that the figure could change during the year.

Hope this helps.

Regards

EdInvestor

Hi Travelfreak,

OK it looks like this to me:

If you keep on paying your premiums to maturity in 9 years time you will receive an absolute minimum of 21,630.24 and that's genuinely guaranteed. You will also receive 42k inclusive life cover over the period. More bonuses could be added, but they will probably be small. There might be a bit of terminal bonus at the end, but it too would likely be small. Very unlikely to amount to more than 23k in total IMHO.

If you cashed in the policy now, you would get a surrender value of 12,348.44. If you invested that S/V and the 60 pound a month premiums in an account paying 4.5% tax free interest, you would end up with 26,316 in nine years time, assuming the interest rate remained at that level.


So it looks like about 23k vs about 26k in 9 years time. But it's not really totally clear cut. You could get a bit more in bonuses, you could get a bit less in interest.

Do you need the life cover? If you do then this may well be the deciding factor as you're 15 years older than when you took out the policy, so it will be more expensive, particularly if there's any ill health. Get a quote for 42k's worth of alternative cover from a cheap provider like Tesco and see how much replacement will cost.

One other aspect: the endowment is a more or less tax sheltered investment - no CGT to pay when it matures. So your ISA is available for other savings.That might also be a consideration.

Good luck and do let us know what you decide