Endowment Shortfall! What To Do Next?

EdInvestor

Hi amani


I wonder if you could just confirm the monthly premium you are paying on the endowment. We can then work out how much you are paying in charges and (possibly unnecessary) life cover, compared with what you would pay if you deployed the funds in a different way, eg by reducing the size of your loan.

amani_2

HI EdInvestor

My monthly premium is £42.11

sarahe

Hello
As I have said before, and sorted out with the help of the good people here, I had an endowment with FP took out in 1993 - £56 ish a month for £38,000
My claim for misselling was upheld - but they wanted me to cash in the policy.
I hadn't thought about this before - but it certainly made me look carefully at my finances.
I decided to pay off as much of the mortgage as possible - kept 3 months wages - sold my ISAs -and should pay off the mortgage sooner (2009) rather than in 2018.
So at least you are looking at it and not just carrying on.
I will never again ignore what is happening with my money!
Good Luck in sorting it out.

EdInvestor

Hi amani

Is this a With profits or unit linked endowment you have?

If you surrendered it and used it as mentioned before, the return after 12 years would be 26,280 - that's guaranteed - it's juts a question of compound interest.

An FP WP endowment is likely to return not much more than half that.A unit linked endowment might return a bit more than your mortgage rate, but not much more and neither of these will be guaranteed.

Do you need the life cover?

amani_2

HI EdInvestor it is a with profits endowment. yes I need the life cover.

What do you mean by compound interest??????????


AMANI XXX

dunstonh

Friends Provident's endowments are not with profits only. The unitised with profits fund is one of the funds that is available.

You dont have to be in the with profits fund if you dont want to.

plonkee

The Effect of Compound Interest:

Suppose you cashed in the policy, then you would have £7189.90.

If you then added to this the sum you have been paying for the endpwment premium (£42.11). Then at the end of 1 year you would have paid in
£7189.90 + 12x£42.11 = £7695.22

Assuming that interest is paid annually, with a 7.34% interest rate, this would generate about £564 in interest.

So you then have a sum of about £8260.

If you then added to this the sum you have been paying for the endowment premium (£42.11). Then at the end of the 2nd year you would have
£8260 + 12x£42.11 = £8765 (approx)

Then the 7.35% interest is calculated at £643, giving you at total after 2 years of £9408.

And so on.

Eventually you will get the £24,690 stated by EdInvestor.

Its called compound interest because you earn interest on the interest you earned in the previous years.

You get the 7.34% by putting the lump sum and the premium money as overpayments to your existing mortgage.

If you just put the lump sum into the mortgage, you would get after the 12 years £16,821.39 through the power of compound interest.

Whichever way you do it, there is the possibility that you will still fall short. The best ways to avoid or mitigate that risk are one or more of overpaying your mortgage still further each month, reducing the interest rate on the mortgage, or extending the term of the mortgage.

If it were me, I would be tempted to take the lump sum and pay a bit extra each month to ensure no shortfall. I would also look into remortgaging to a repayment mortgage with a lower interest rate. This is not necessarily the best route from a financial point of view, simply the one I would feel most comfortable with.

dunstonh

What about the cost of replacement life cover?

EdInvestor

Often people don't need the life cover as they are already well covered elsewhere.In addition the cost is now much lower than when the endowments were taken out. It may be a factor for people who have health issues, but it rarely seems to feature as a major factor in the decision to keep or bin a policy.

dunstonh

It does feature heavily in the decision. Disregarding it can have significant consequences if you need it. So, if it is still required you need to find out the cost of replacement cover. The cost then needs to be deducted from the endowment premium and that can then be used to project fowards on an ISA or against the mortgage.