Endowment - quick question

hayley1471

I have an endowment with critical illness cover from Scottish Widows. I currently pay £79.14 per month and have been paying for just over 8 years.

The cash in value is around £7,300, less than I have paid in. I spoke to them about when I could expect to see it equalling the amount I have paid in. They told me that they start to add bonuses after the tenth year. I didn't find out what those bonuses would be.

My question is, given that I am currently in debt (see sig), and struggling to make my SOA balance, would I be as well to cash this in now and clear my debt. Or keep it running and hope to eventually see all the money I paid in returned to me. It is supposed to pay out £41,800 in 17 years time, when I shall be 56, so that would be a nice sum to get my hands on at that time.

I no longer have a mortgage, so won't need it to clear that. However, in 3 years time I will have the option of buying my council house, so it could be useful if I decide to do that.

I have been quoted around £45 a month for life cover/critical illness. It is so high because over the last 2 years I have developed a chronic back problem. This policy excludes permanent disability due to my back. The Scottish Widows plan hasn't any special things imposed on it, as I was in good health when I took the plan out.

Any thoughts or advice gratefully received.

dunstonh

The cash in value is around £7,300, less than I have paid in. I spoke to them about when I could expect to see it equalling the amount I have paid in. They told me that they start to add bonuses after the tenth year. I didn't find out what those bonuses would be.

On a 25 year term break even point would be expected around year 10.

You can check your original illustration if you kept it as that would project using the first 5 years, each 5th anniversary and the last 5 years.

I have been quoted around £45 a month for life cover/critical illness. It is so high because over the last 2 years I have developed a chronic back problem. This policy excludes permanent disability due to my back. The Scottish Widows plan hasn't any special things imposed on it, as I was in good health when I took the plan out.

Probably sensible to keep the Scot Wid endowment as its only £30 more and you get an investment element. However, that would need a proper cost/benefits analysis and a review of investment options.

A very quick and dirty calc shows that the £34pm difference (between endowment and replacement cover) over the remaining 17 years costs you £6936. So, is the endowment likely to pay more than that back?

Also, the CI definitions from 8 years ago could include things which are not available on current plans now as the definitions have been reduced in recent times. Is the new plan on guaranteed terms or reviewable terms? The endomwent is on guarnteed terms but many new plans including CI are on reviewable (you can get guaranteed but they cost more).

hayley1471

My original documentation only shows projection for the first 5 years.

I am expecting the endowment to pay out more than £6936, given that it is worth more than that atm.

The CI is on guaranteed terms, they have never reviewed it.

dunstonh

My original documentation only shows projection for the first 5 years.

Strange. That would not make it compliant as the illustrations have to use a set structure which was in place 8 years ago. Is there a page missing?

The CI is on guaranteed terms, they have never reviewed it.

What about the one you have got the quote on? Did you pick reviewable or guaranteed?

also back on endowments, is it unit linked or with profits? Is it a real scot widows policy or a rebadged lloydstsb/black horse life policy?

hayley1471

Just pulled the original documents out. My apologies, it does show up to five years then each five year point up to 25 years assuming a growth of 6%. According to their forecast, it breaks even during year 15 (I am shocked!). During that time they will have made £8,270 in deductions!

I think it is unit linked, becsuse the last letter I got from them talks about 'The value of the Units... was £7252.08.

The original paperwork was from LloydsTSB, now the letters are from Scottish Widows.

And I am not sure whether the quote for life insurance I got recently, was reviewable or guaranteed.

dunstonh

Right, that is all good news. Unit linked is better than with profits and a target growth rate of 6% is good. (too many were set up at 7 to 7.5% although some ex LTSB ones were set up with 4.4%).

Deductions are cumulative and assume reinvestment at 6% so dont read too much into that. By modern standards endomwents are obsolete and are expensive but remember they were designed in the days of a boom/bust economy with high inflation and it wouldnt have taken long for inflation to eat up those charges and make them look quite small.

You will have access to the LTSB internal range of funds with this endowment. I may be worth looking into a bit of switching as most people that buy from banks end up in the default fund which is typically their balanced managed fund (or just managed as they are sometimes called). Switching will be free and it may improve the potential and allow you to include areas to suit your risk profile.

Most, if not all 25 year unit linked endowments with a target growth rate of 6% would be expected to hit target even if the default fund. In short term periods you would expect them to go off track and show shortfalls. That is not a bad thing but actually a good thing in your case.

You want the markets to be bad in the early years as the unit price drops. You then buy your units much cheaper. This puts the endowment into a shortfall position on projections but its a good thing and makes a bit of a mockery over the projections and complaints process. As time goes on and the unit price zig zags upwards, it is those cheap units you bought that will make the most money.

If you look at the illustrations again (and well done for keeping them) take a look at the 10 year figure as that is your nearest figure to measure by. How far is your value from that 10 year figure?

hayley1471

Gosh, thats all really interesting. So do you think I would be wise to keep it, or cut my loses and thrown the money at my debt?

Glad I kept the paperwork, sometimes is pays off to be a hoarder!

It is called a 'Low Cost Mortgage Plan', and it is a 'Balanced fund'.

In the original documents it says: 'What you might get back' and it says it assumes investments will grow at 6%. The 10 (15) year figure is:

Total paid in: £9497 (£14,246)
Deductions: £3400 (£5180)
Effect of deductions: £4690 (£8270)
What you might get back: £8220 (£14,500)

The value of the units in September 2007 is £7252, but this will have gone up slightly I guess.

hayley1471

Just found a letter in the file from June 2007 which says something about an 'Amber alert'. Seems to mean that it won't pay out what they originally said, that doesn't suprise me. I remember asking the salesman about this and he said there were no guarantees because investments go up and down. I can't find anything that tells me what the growth rate for the policy has actually been so far. Is there a way to work this out?

dunstonh

Gosh, thats all really interesting. So do you think I would be wise to keep it, or cut my loses and thrown the money at my debt?

The endowment does have the potential to hit target and pay a surplus. However, it hasnt got the long term potential to come in better than the APRs you are paying on those credit cards. So, clearing the debt would appear to make sense.

However, before you do that check to see if the current value and surrender value are the same. There may be a penalty (LTSB used to be first 10 years and no penalty thereafter but yours is a later one which may be different).

Glad I kept the paperwork, sometimes is pays off to be a hoarder!

Because of that you have made an analysis so much easier. Well done.

It is called a 'Low Cost Mortgage Plan', and it is a 'Balanced fund'.

How did I guess right.... thats banks for you. So predictable.

The value of the units in September 2007 is £7252, but this will have gone up slightly I guess.

Almost certainly gone down. Markets have been rocky the last few weeks. Thats good for your monthly payments but not good for the £7252 in the short term (but in long term its not an issue). That fund is showing just over 8% loss in last 3 months.

Just found a letter in the file from June 2007 which says something about an 'Amber alert'. Seems to mean that it won't pay out what they originally said, that doesn't suprise me.

Dont worry about that. Even the best endowments on track for a surplus usually show an amber warning and shortfall. Its more down to the nature of the projections rather than quality of the product. Your fund has been growing in double digits mostly for the last 5 years so looking at a 6% projection when its been doing better than that is not a good idea.

00-12 months 4.18%
12-24 months 13.85%
24-36 months 18.55%
36-48 months 10.46%
48-60 months 17.18%

hayley1471

dunstonh wrote: »

Your fund has been growing in double digits mostly for the last 5 years so looking at a 6% projection when its been doing better than that is not a good idea.

00-12 months 4.18%
12-24 months 13.85%
24-36 months 18.55%
36-48 months 10.46%
48-60 months 17.18%

Wow! How did you work that out?

So, in general, if I find ways to earn enough to clear the debt, I would be wise to keep it going, even though it seems at the moment that I am throwing good money at something that doesn't appear to be growing in value.

I am hoping to balance transfer the bulk of my debt to 2.9% for a fixed 2 years, so that should help make a dent in it.

dunstonh

Wow! How did you work that out?

I wouldn't be much of an IFA if I didn't have the software and tools available to research independently.

So, in general, if I find ways to earn enough to clear the debt, I would be wise to keep it going

Its a judgement call. I would be inclined to clear debts and then look at using ISAs to rebuild the investment. ISAs are cheaper and most cost efficient.

ven though it seems at the moment that I am throwing good money at something that doesn't appear to be growing in value.

You can see from those figures it has been growing in value but an ISA would be better still.