Another L&G red letter - I'm Sooooo confused

suchard

Really sorry if this is just another request for help - but I've spent a long time reading through the links and trying to apply all your wonderful advice to my own situation. But I'm still quite confused !!!

L&G endowment policy - started June 1988, maturing 2013 - monthly premium of £69. Target amount is (ha ha) £52,000. Current shortfall ranging between £14,700 (at 4% pa) and £2,800 (at 8% pa). L&G's view, they state, is that 6% is reasonable assumption - which leaves us with shortfall of £9,100.

We have £113,000 offset mortgage with First Direct. The surrender value is £20,572. Should we maybe consider cashing this policy in, reducing our mortgage and then, further reduce it with the monthly payments of £69.

My brain is befuddled !!! Very many thanks if you can offer any insight/advice

dougk_2

As you have an ofset mortgage and it is now more than the 52k the original plan was meant to cover , why worry?

I would just keep paying the £69 and assume it will cover about 42k of the mortgage in the end. any extra is a bonus that can be spent on a holiday or something!

Cashing it in now means you won't get as much.

At £69 per month you will be spending about £7000k to Pay fully into the endowment.
So adding 7k and gaining an extra 20k on its value in 8 years time does not seem to bad to me. Plus in the mean time you have £52k of life insurance!

suchard

Thanks dougk - however, I said I was confused but maybe I explained badly. A bit more detail. This is one of 3 endowment policies. Other 2 are on track. But seeing as we'll owe £113,000 and that this policy which should cover £52,000 of it, but won't. We'll be about £9,000 short to pay the mortgage off in 2013. Sorry, am I missing something here. Don't quite follow your thinking.

EdInvestor

Hi suchard,

What's the value of the guaranteed sum assured and declared bonuses so far?

Compensationitis

I would like to take your case on for free, as a matter of public interest.

Pal

Is that meant to be a joke?

suchard

Ed - many thanks. Latest statement (Dec 2003 - another due any time now) shows:

Basic sum assured + annual bonuses todate = £25,862.
Surrender value (quoted today) £20,572

Your thoughts are much appreciated.

EdInvestor

Oh dear. Not a good one.

That figure of 25,862 is what you are guaranteed to get on maturity, as long as you keep paying the premiums.In the past, you could expect plenty of bonuses to be added to that figure (like 4-5% a year) boosting it considerably.But you're probably now only getting 1% or 1.5%,if that, right? On top of that, you would normally get a terminal or final bonus, which would sometimes double the value of the policy :eek: [That's where those promises of retirement cruises came from].

These days you can forget all that stuff about terminal bonuses and it's quite unlikely that the guaranteeed value will go up by much at all over the 9 years either.

So let's look at what can be done.If you cash in the policy at the surrender value of 20,572 and put it in the bank at 4.5% and pay in the premiums up till maturity you would end up with 39,733. That's still nowhere near the target amount of 52k but it's a lot better than the guaranteed amount.

So my suggestion would be that you surrender this policy, use the proceeds to reduce the size of the mortgage immediately and pay the endowment premiums into the mortgage as well as the normal interest payment.You may need to top up a bit, or pay down extra with lump sums, or you could consider a remortgage to get a better rate.

One point: the policy includes life assurance.If you don't need this, no matter.If you do need to replace it, do so before surrender, just in case there's any problem.

dougk_2

Whilst I understand Editor's reasoning, You first have to find a bank account that pays 4.5% pa after tax. There is also no guarantee this rate will remain at 4.5% and if interest rates drop this may drop too. You also have to consider how good you are at keeping this money "safe" and avoid the temptation to ever use it.

The other option s to use the lump sum now and pay off part of the mortgage (thereby reducing the amount of interest you pay each month). the premiums you were paying could then be used to overpay the mortgage, but even then I suspect you would still have a shortfall at the end.

The life insurance is also a "bonus" that should not be forgotten. Life insurance on would need paying for so thereby increase the amount you are spending per month (should you require it).

dunstonh

We do have to be very careful now when looking at bonuses. The life companies are going to be controlling bonuses with more focus on the terminal bonus than the annual bonus. Terminal bonuses are not included in the projection and you may be giving away more than you realise if you surrender.

EdInvestor

I'm afraid terminal bonuses are rapidly gowing the way of the dodo.:( Moneysavers will probably remember five years or so ago when TBs made up half the policy value at some places. Now they have disappeared almost completely on 10-15 year policies and are down to single digit at most big companies on 20 year policies with 25 years also diminishing rapidly.

The reason for this is that a big chunk of the original earnings in the TB - which came from the rising stockmarket in the 90s - have disappeared in the market crash.Then, after that, because of the failure of Equitable Life mainly, the FSA has made all the insurers put the money backing guarantees into safe investments like bonds. This means that your guaranteed value is safe - it will definitely be there at maturity, but in return for that safety, you get low returns, lower than 5% at most of the WP funds which are closed to new business (which is now more than half of them).You also have to pay a small charge for any guarantee.

On top of that we have the era of "low inflation,low interest rates", which means stock market returns are also significantly down on the high inflation era.So a triple whammy.IMHO decent sized TBs will only survive at a few companies like the Pru, perhaps Royal London and Liverpool Victoria. You might get a smaller one at NU.But I wouldn't count on them at all.

Of course it's not as though anyone who took out an endowment mortgage in the 80s and 90s has actually made an overall loss, is it? Most people are sitting on a big capital gain from the rise in house prices, and have also had lots more money to spend because the monthly premium on the mortgage has gone down because of lower interest rates.Some people have even used the opportunity to pay off their mortgage in advance. What a luxury that is, it would have been totally unaffordable in the old high inflation/high interest rate era.

It's really just a matter of tidying up the loose ends from the endowment for most people, it seems to me.