Maturing endowment didn't match payout prediction

jagu

I took out an endowment policy 25 years ago and it matured last week. In February 2007, the insurance company told me it was on target to pay back its full face value. In fact, all the illustrations they gave showed it exceeding the face value (£40,000). However, it has just matured (16 months since their letter) and is nearly £2000 under the target value. Needless to say, I have been continuing to pay premiums for those 16 months (about £800). How can things go so badly wrong in such a short time? Shouldn't the final stages of a product like this be covered by safe investments? I have written to the insurance company but any hints or suggestions on how to get them to pay the shortfall would be appreciated.

Thaks very much,

turbobob

jagu wrote: »

How can things go so badly wrong in such a short time? Shouldn't the final stages of a product like this be covered by safe investments?

It has happened because the markets in general have gone down recently. You don't say what type of policy it is but if it was taken out 25 years ago traditional with profits policies were most common...

With these you essentially have:
A basic sum assured - a guaranteed amount that will be paid out at maturity regardless of bonuses. Usually set at approximately 1/3rd of the target amount.
Annual bonuses - added each year. Once added these cannot be taken away and they form part of the guaranteed maturity value. For this reason, they tend to be set at conservative levels (set them too high and you could end up with a situation where assets in the life fund are insufficient to meet guarantees, like happened to Equitable Life)
Terminal bonus - this is the biggest variable, and can be changed regularly and even removed entirely to reflect investment performance. It is paid at maturity.

If a company makes major cuts in its terminal bonus rates close to maturity then it could significantly reduce the payout.

By contrast, if its a unit linked policy in a managed fund, for example, then it is directly affected by the value of the investment fund which will change daily.

I have written to the insurance company but any hints or suggestions on how to get them to pay the shortfall would be appreciated.

Unless you've got a written guarantee (from the life company) that it would pay out at least £40,000 at maturity then you cannot force them to make up the shortfall. If one of the life companies salesman sold you the policy and didn't explain the risks then you could make a mis-selling complaint. The compensation, if the complaint were upheld, won't be in the form of making up a shortfall (but on a matured policy often amounts to something similar). There are numerous threads here about making endowment mis-selling complaints.

dunstonh

How can things go so badly wrong in such a short time?

Stockmarket is down 20%. Property is down 15-20%. Fixed interest securities are down around 10%-15%

Shouldn't the final stages of a product like this be covered by safe investments?

Yes if you switched your money into the cash/deposit fund.

I have written to the insurance company but any hints or suggestions on how to get them to pay the shortfall would be appreciated.

They wont pay out. They have no reason to.

jagu

turbobob wrote: »

It has happened because the markets in general have gone down recently. You don't say what type of policy it is but if it was taken out 25 years ago traditional with profits policies were most common...

turbobob wrote: »

With these you essentially have:
Terminal bonus - this is the biggest variable, and can be changed regularly and even removed entirely to reflect investment performance. It is paid at maturity.

dunstonh wrote: »

Stockmarket is down 20%. Property is down 15-20%. Fixed interest securities are down around 10%-15%

Thanks for your comments, which I'm sure are right. What is difficult to accept is that the investments they are using to pay my terminal bonus are so volatile. Surely they should look at their commitments a year out and make sure the money for those is invested in gilts etc. In effect, they taken the premiums I've paid them over the last year and flushed them down the pan!

All I can say is that if your endowment provider tells you your endowment is on target to pay its full value in a year's time, this is a meaningless statement. I think this will have to be my argument with the ombudsman. I may not get anywhere but insurance companies shouldn't be sending out statements telling you you're on target when you could be so far off.

martinman3

jagu wrote: »

What is difficult to accept is that the investments they are using to pay my terminal bonus are so volatile. Surely they should look at their commitments a year out and make sure the money for those is invested in gilts etc. In effect, they taken the premiums I've paid them over the last year and flushed them down the pan!

It was revealed a few years ago how the company Standard Life had "managed" their fund, it was not as "active" as you might expect. It seemed as if decisions of which companies to invest in or not to invest in were taken very rarely and the rest of the time they continued to just invest in the same stock, other life companies probably did the same and their fund managers received outrageous salaries for doing this. Needless to say, they were seriously damaged by the dot.com crash as they did not react quick enough. It was said at the time that if you want active management see a hedge fund.

Please tell us, who are the life company ?

dunstonh

All I can say is that if your endowment provider tells you your endowment is on target to pay its full value in a year's time, this is a meaningless statement

The converse is also true. Many illustrative projections issued have understated the returns as well giving the impression of shortfalls when the investment returns have been better.

I think this will have to be my argument with the ombudsman.
I may not get anywhere but insurance companies shouldn't be sending out statements telling you you're on target when you could be so far off.

The problem you have is that the FSA set the rules for projections and the companies act within those rules. The projections are also correct in the format they are laid out. i.e. if x% p.a. is achieved then this is the amount you will get. They do so they are example rates and there are no guarantees.

So, if the provider has complied with the standard risk warnings and the illustrations are correct (note they are illustrations of what you may get, not predictions of what you will get) then the FOS has no grounds to uphold the complaint.

Dick_here

dunstonh wrote: »

The converse is also true. Many illustrative projections issued have understated the returns as well giving the impression of shortfalls when the investment returns have been better.

Two meaningless statements don't make a right one though. And being understated is obviously better for the customer than the reverse.

dunstonh

!!!!!!_here wrote: »

Two meaningless statements don't make a right one though. And being understated is obviously better for the customer than the reverse.

You have seen how many times I have said that projections are just one bit of the information and that you shouldnt rely on them. With some endowments they are just plain misleading. However, that isnt the fault of the provider. So, whilst I sympathise with jagu's position and can understand the frustration, making a complaint to the provider and then FOS is unlikely to yield any positive outcome because they have followed those requirements set by the FSA. No rule breach will usually result in no postive outcome.

Dick_here

dunstonh wrote: »

You have seen how many times I have said that projections are just one bit of the information and that you shouldnt rely on them.

But the reality is that for most people that is all they have to go on.

With some endowments they are just plain misleading. However, that isnt the fault of the provider.

It certainly isn't the fault of the customer though, is it.

So, whilst I sympathise with jagu's position and can understand the frustration, making a complaint to the provider and then FOS is unlikely to yield any positive outcome because they have followed those requirements set by the FSA. No rule breach will usually result in no postive outcome.

I agree, but that doesn't make it acceptable, does it.

EdInvestor

What's unacceptable is that customers aren't told that a cash fund exists, much less that they can move their money into it in the run-up to maturity.

dunstonh

EdInvestor wrote: »

What's unacceptable is that customers aren't told that a cash fund exists, much less that they can move their money into it in the run-up to maturity.

The information is available. You either use an adviser or do it yourself. You are a fan of the do it yourself option but that does mean taking responsibility.