underperforming endowment - do I get rid?

Yorkshire1944_2

Hi, this is my first time on any forum, I am desperate for sensible advice.

I have a mortgage endowment policy running from 03/86 to 03/2011. Sum assured £10560, death benefit £30k, original projected maturity value in xs of £30k. It covers a £30k interest only mortgage and is, naturally, underperforming.

Question :- If I downsize my mortgage to £20k (by moving) to cover the projected shortfall, should I keep the policy until maturity and hope, or cash it in and use the current S.V. of £17k towards the £20k needed and be mortgage free?

This would save premiums of £49.50 p.m. and interest of approx £94p.m. on a £20k mortgage.

Bonuses added to the policy in 2004 were approx £205 with rates of 0.8% on amount of benefit and 1.5% on existing bonuses. Prudential seem confident that "6% is currently a reasonable assumption for the rate of long term future growth". How does this equate to above bonuses?

Anybody out there make sense of all this please?

EdInvestor

Hi Yorkshire 1944


Firstly, if you were to cash in the endowment for the surrender value of 17k and put it in a high interest account along with the monthly premiums for 6 years at 4.5% you would end up with 26,225 - so a bit under 4k short of the 30k needed.You'd need to double your monthly payment into the account to 100 pounds a month to hit the 30k target ( don't forget you've probably already saved that much because of lower interest rates applicable to the I/O mortgage over the last few years ).

You could alternatively use the additional money to reduce the outstanding capital amount of the mortgage, which might be a better idea depending on the interest rate you pay. A third possibility is to remortgage to repayment on the best terms possible using the 17k to cut the mortgage amount back to 13k.

This also would assume that you don;t need the life cover included in the endowment.If you do need it, you should get some quotes first, especially if there are any health issues and then see how it adds up.

Now the Pru has the best performing WP fund in the country, so if any insurer will end up being able to deliver on the endowment it's the Pru. To get a better idea of whether it's sensible to stay, could you tell me

a) What is the total value of the Guaranteed Sum Assured PLUS the existing attached guaranteed bonuses.
b) Is there a terminal bonus component in the policy and if so how much is it (%)

Yorkshire1944_2

Hi Editor

Many thanks for your reply. I will try to get information for monday.

stressedoutmum

I took out an endownment in 1988 WITH AXA Equity and Law for £39000 and it finishes in 2013. This is used to pay my mortgate. Current surrender value is approx £14000. Highest Illustration is £33,000 and lowest £25,000 so it is between £6,000 and £14,000 under performing. Still want mortgage paid off in 2013 - what would you financial whizz kids advise.

EdInvestor

Hi stressed out mum,

Looking at the endowment first, perhaps you can provide these figures:

1.The Guaranteed Sum Assured
2.The total of attaching declared (reversionary) bonuses so far
3.Amount or % of terminal bonus in the policy
4.Your monthly premium

[I assume it's a With-profits endowment]

Then we can work it out

stressedoutmum

Its not a with profits its index linked or something. The sum assured is £35000. It costs around £75 per month. We did initially increase our payments to 'meet target' and eventually realised we were paying money into a loss-maker. Hope this makes sense!

dunstonh

index linked sounds more like a unit linked fund. If that is the case, its a low risk fund and shouldnt be a loss maker. Over the last 10 years it would almost certainly outperformed a bank or building society account and not had a drop when the stockmarket crashed.

Axa's index linked fund has grown by 86.95% before charges over the last 10 years and shows steady growth with very little volatility.

That is a gross rate average of 8.695%pa. before charges. The charges are probably around the 2% mark for an old endowment giving a net rate of say 6.5%p.a. Endowments are set up to require a growth rate of between 4 and 8%. The better ones at 4%. However, most seem to be in the 6-7.5% band. Anything above that was stupid.

Setting up a target growth rate of 4% and using an index linked fund would be sensible planning (although little potential for extra and risk which isnt present on repayment mortgage). However, i bet you werent set up at 4% and are more likely on the 6-7.5% target rate (you can tell by looking at the original documentation). In which case you do have to query how a low risk fund that is usually going to hover round the 5% mark could be justified to be used to hit a higher target growth rate.

Lots of assumptions in there but

stressedoutmum

have checked my policy and can't find a figure it was set up at although when they do the 'forecast' it seems to be if the growth is at 7% then it meets target so I am assuming 7% was my set up figure. If its a low risk fund then how are my figures so low at between 6 and 14 thousand under my requirements. Is this my projected shortfall and should I be looking at a repayment to cover this difference. I can't understand if its unit linked why my figures are so bad then. The company are no good they just say don't worry lots of time to run on it yet and hopefully it will catch up and the people who sold me the policy are no longer in business.

dunstonh

Although its 7% average over the term, endowments work on a curve and not straight line.

Projections assume a straght line growth which distorts the final maturity value. The compound effect of income from the fund buying more units plus endowments also often benefit from increased allocations later in the term means that it may well reduce the shortfall

rizla01

Hi,

I too have an endowment situation.

Mine expires in 2007 (1/1) and The attaching bonuses are well under the projected. Lately, if anything, the surrender value appears to be LESS pro rata than it was a year or so, ago.

My worry is that the increase will only be in line with what I'm paying in and not much more.

Mines a Standard Life with profits taken out 23 years ago.

any suggestions?

dunstonh

Standard Life endowments have to be looked at very carefully. They appear to projection from the lower surrender value and do not include any terminal bonuses. On quite a few occassions their 4% projection has been lower than the guaranteed sum assured and annual bonuses which is not possible.