Endowment with profits & critical illness calculation upon death claim 1Yleft of full 25Y term

JohnPick

A couple of questions on this.
1.Does the endowment provider have to advise on if its better to continue to completion or to process the death claim.
2. The policy currently has a shortfall based on original requirements of around 6K, but no terminal bonus applied, the mortgage has been paid off so its not a big problem to be honest, however they advised they would need to do a calculation, although minimum payout would be sum insured, so question is what do they have to calculate, and how can it be checked to ensure your not taken advantage of you at a vulnerable time (insurance companies in general don't have good reputations on payouts)?
3. Why are you not able to find out the calculation methods on policy documentation for such events as critical illness and death, should it be on there?
4.Why is none of this ever explained how things work wrt to the investment part and the insurance elements?
5. why is the advice online so dam confusing?
(premiums, bonuses, insurance, are not really covered and some sites seem to conflict others, but they may or may not apply to UK policies)
6. Why does no one explain tax liabilities at the time the policy was taken out for claims made?
(it appears that some policies could be subjected to capital gains and or income tax, depending on how the policy has been used over the years and how long its run for, but its very hard to follow, it be great if there was some comprehensive simple advice to follow from the likes of this forum/ Martin's Show.
7. Why were we asked about cause of death, its in the death certificate?
8. How would you know when taking out a policy what deaths/ illnesses are covered and which ones are not?

Sorry for all the questions, but there is a longer than anticipated time to process the claim due to Covid and a few things mentioned by the insurance company, raised concerns, that I was not aware of until speaking with the insurance company.

kingstreet

Presumably this is a low-cost endowment where a level of bonus was assumed to assist in reaching the target amount at maturity and was added to the basic sum assured each year and to keep the premiums low, a decreasing term assurance was added to reach the minimum death benefit.
Therefore, at any time the savings element and the decreasing death benefit would need to be calculated to see if the sum of the two is greater than the minimum death benefit.
I don't know how an insurer could keep a plan in force once the death of the policyholder has taken place.

JohnPick

The policy holder is alive, I dont know how these things work, having looked at the documentation from day one till now I still don't know how it works.
For me the endowment was taken out over 25 years, and has about 1yr to 18 months eft without looking at the paperwork for specific dates.
How do you determine the decreasing death benefit?  should there not be a guide as to how it actually works. (bonuses are stated in the paperwork) so only need to know how the death insurance is calculated and add them up?
For example how could you decrease the sum insured, if you don't know the value of the investment and the mortgage was interest only.
Surely you would expect if it was a repayment mortgage that the sum insured could decrease inline with the outstanding balance.

JohnPick

Thanks for taking the time to reply I appreciate its only guidance and not advice in a professional capacity

Old_Lifer

The policy proceeds become payable at the end of the term  or on death within the term.   If this is a death claim the policy is now  payable,  there is no option to continue the policy to the maturity date.

Your post mentions bonuses (so a with-profits policy? )  and also no terminal bonus  (so a unit-linked policy?).  The policy is almost certainly a low-cost endowment as  Kingstreet  says.

If it is a unit-linked policy, the payout will be either the current sum assured or the value of the units, whichever is the higher

If it is unitised with-profits, the payout will be the value of the units  ( any MVA currently in force is usually not applied on death or at maturity)   plus terminal bonus  (the terminal bonus  depends on the length of time the policy has been in force  -  the longer the better -  and is payable in full on death or at maturity).

If it is a conventional policy,  the payout will be  the endowment sum assured, the total annual bonuses at the last bonus declaration plus  a small interim bonus to bridge the gap between the last declaration and the date of death  and  a terminal bonus as mentioned above.

As the policy is mortgage related, it is almost certainly a qualifying policy and if  the same  premium has been paid each month throughout the term  the proceeds would have been  tax-free at maturity.    It is only if the policy had been altered significantly or had been surrendered at a profit early in the term,  that the policy would become non-qualifying and would potentially (though not necessarliy) render the policyholder  liable to higher rate tax.

Old_Lifer

I started my above post about 6pm , I  have been away from the screen a couple of  times and am not the quickest person on a computer keyboard nowadays so I didn't post my comment until after 7pm and now discover that the policyholder is very much  alive.

For a  simple mortgage protection  policy, how the  term assurance decreases depends on the rate of mortgage interest assumed when the policy was taken-out.  During my service we had a range of different tables and would use that which corresponded to the  mortgage rate at that time.  Of course , mortgage  rates could change at any time  after the policy was taken-out so the term assurance reduced only broadly in line with the reduction in the  mortgage balance .   Of course with a low-cost endowment there is an investment element and the rate of reduction in the term assurance will be  based the level of expected increase in the value of the investment element.

JohnPick

Okay i have some bits i can look at.
I am guessing that the terminal bonuses will apply then, wasn't sure as the policy hasn't gone to full term.

Old_Lifer

The terminal bonus on a with-profits policy becomes payable at the end of the term or on death within the term.  Put simply, it is based on the length of time the policy has been in force  (more correctly,  it is the length of time the policy has been a with- profits policy,  which matters if  the policy has been altered to with-profits during the term).  If you surrender a policy before maturity you will receive the surrender value of the current terminal bonus applicable to your policy.

If you have a conventional policy where annual bonuses are added each year, the annual bonuses once attached to the policy are guaranteed and cannot be taken away.   However,  the annual bonuses are reversionary bonuses, which means  they only become payable when the policy becomes payable   i.e. at the end of the term or on death within the term.   If you surrender your policy before maturity you will only receive the surrender value of the attaching annual bonuses.

JohnPick

Thanks for everyones time.
So it will be a qualifying policy as premiums unchanged over the entire term so no tax to pay.
It is a with profits policy with 18 months left, not sure if its unitised or conventional, the surrender value last time it was mentioned was below the target amount around 75 to 80% of the target.
Not sure I am following this properly though.
The minimum death  policy payout has a value call it D.
The surrender value of the policy call it S
Terminal bonus call it T.
So we are saying potentially it could be D + S + T ? which is approximately double the minimum?

but this depends on if its conventional or unitised? 

fewcloudy

JohnPick said:

Thanks for everyones time.
So it will be a qualifying policy as premiums unchanged over the entire term so no tax to pay.
It is a with profits policy with 18 months left, not sure if its unitised or conventional, the surrender value last time it was mentioned was below the target amount around 75 to 80% of the target.
Not sure I am following this properly though.
The minimum death  policy payout has a value call it D.
The surrender value of the policy call it S
Terminal bonus call it T.
So we are saying potentially it could be D + S + T ? which is approximately double the minimum?

but this depends on if its conventional or unitised? 

No I think you are mistaken there. Only value D is definite, as what it might pay out on death of policy holder would have been established at the start and remain unchanged.
Surrender value is approx. what the plan will pay out if you cash it in now.
Terminal bonus is what you MIGHT get if you let it run its course.
After 25 years and with about 1 to go, I would let it run and take the final payout plus terminal bonus.
That's my understanding of it anyway.
*There was a thread on here full of folks with 25 year policies that were nearly finished, might be helpful to look through the last few pages of it.
Here it is...
https://forums.moneysavingexpert.com/discussion/3889479/anyone-with-a-25-year-endowment-which-matured-recently

Old_Lifer

For clarity,  assuming it is a conventional  policy and has annual bonuses added,  you will receive at maturity:

The  basic endowment sum assured  (without any term assurance)

The total annual bonuses  attaching to your policy at the last bonus declaration date before maturity

A small interim bonus to cover the period from the last bonus declaration date to the date of maturity

The terminal bonus

Put simply.  the surrender value is the value of all the above components added together  if the policy is cashed-in now.