Endowment Policies - Everything You Need to Know

There really is no easy way to describe an endowment policy without going into the complexities of how and why they work, so some of this might be difficult to read, however I'm going to stay away from legal terms/jargon as much as possible and give you straight facts in plain English.

First let us discuss what an endowment policy is. An endowment policy essentially, is a life insurance policy with an element of investment. It is not a mortgage. Endowment policies were generally sold to pay off mortgages but in the vast majority of cases, the insurance company and the mortgagor are two separate companies. Usually endowments were sold to run alongside the mortgage, where the lender paid off the interest and used the proceeds from the endowment to pay the capital sum (the amount actually borrowed).

One would be taken out to insure your life for the amount of capital and the investment would be used to pay off the mortgage capital, should the policy holder/s sur vive the term of the contract.

What this means is that a proportion of your monthly premium is going towards the life cover, with the remainder towards the investment. Providing your policy matures "on-track" you will have paid off your capital sum when the term has run.

Unfortunately, most (if not all) endowments are now falling short of their target amount.

Two define endowment policies we would need to create two sub-categories as the two types run in completely different ways.

Unit-linked policies With-profits policies

Unit linked

A unit-linked policy is invested in the stock market, all the funds which can be invested in (each fund being a portfolio of different shares, properties or equities) are controlled by a fund manager and your investment will rise and fall in line with the stock market or inflation, depending on the fund choice.

The fund manager is the person responsible for trying to get you the b est return on your investment, however, you can change funds at any time so if one fund is not performing, or has hit its peak, you can change into a different fund.

The potential risks on with-profits policies are minimised by the fund manager spreading the fund amongst a number of different companies so that if one has a bad time, the overall fund would barely feel it. Counterpoint to that though is that if a company produces amazing results, any potential gains would be barely felt too.

Due to the spread, the fund should rise (or fall) in line with the overall performance of the stockmarket.

With profits

With-profits policies are not directly affected by any stock market fluctuations (although if the economic climate is on a downturn, the need for money heightens for policy holders and this can affect the with-profits policies), and are relatively stable in comparison with unit-linked policies.

With-profits are based on how the company a s a whole is performing. A percentage of the profits the company makes gets passed onto the with-profits members through bonuses. These bonuses get paid yearly and at the very end of the term.

As with unit-linked policies, a proportion of your premium is used as life insurance, and the rest is used for the investment.

As a quick guide to with-profits policies, you need to be aware of the following terms:

Sum assured - This is the cash amount that you have been guaranteed to make off the policy from the outset providing it matures. Reversionary bonuses - These are the bonuses that get applied to your policy on an annual basis. Terminal bonus - This is the bonus that gets applied to your policy when it is exited.

Find out what your Sum Assured is and add it to the amount of reversionary bonuses you have had to date. This figure will be your worst case scenario. These figures are guaranteed (providing the policy matures).

Wh at invariable affects the value that your policy matures at will be the terminal bonus. This is a percentage figure and is added to the total of the sum assured and reversionary bonuses applied to date. When you see the value of your policy dropping, it is the terminal bonus that's causing this.

To give you an idea of how the terminal bonus has dropped over the last 10 years I can quote one insurance company I recently called, I'm sure they are neither the best nor worst performers but I'm using them as an example. This is for a 25-year term.

Terminal bonus 2009 - 15% Terminal bonus 2000 - 175%

Now if I gave you some rough figures here, you will see just how much of a difference this has made to the maturing value of a policy. We will use exactly the same example but maturing 9 years apart.

Target amount - 50,000 Sum assured - 20,000 Reversionary bonuses - 10,250 Terminal bonus (15% of sum assured + reversionary bonuses) - 4,537.50 Total maturity value - 34,785.50 Shortfall of - 15,214.50

And now if that policy was maturing 9 years ago:

Target amount - 50,000 Sum assured - 20,000 Reversionary bonuses - 10,250 Terminal bonus (175% of sum assured + reversionary bonuses) - 52,937.50 Total maturity value - 83,187.50 Excess of - 33,187.50

As you can see, on an average 50,000 policy, the difference in the maturity values over the last 9 years amount to 48,402.

Now by now you might very well be thinking of calling your insurance company and asking them what the hell they are playing at. But before you do let me tell you why these w ith-profits policies are not hitting target right now (and likely never will again). It's because of people surrendering the policies early. You see, the performance of these funds is based on the amount of money in the fund. As more and more people cash in their money early (therefore not allowing for the desired level of growth) more money is taken out of the with-profits pot.

These policies are failing because of the people surrendering the policy early, taking their money and running.

What to do with these policies

Well you do have a number of options.

Leave the policy to mature Surrender it early Sell it Complain

You can leave the policy to mature. If you have a unit-linked policy then on the day of the maturity, the value of the fund will be locked in and paid out to you. If your policy is with-profits, the terminal bonus on the date of maturity will get applied and the policy will be paid out. Please be aware that the terminal bonu s rate can change at any time though and it might be that you are unlucky and it changes the day your policy matures. It may even be taken away completely and you would be left with the worst case scenario as I mentioned earlier.

You can, of course, surrender the policy early. There should be no penalty for surrendering it early (unless possibly you are in a with-profits fund in a unit linked policy), however with a with profits policy your values are going to be reduced. As in the example we went through earlier, if your sum assured was 20,000 then you would expect to get 20,000 if you surrendered the policy on the second day would you? This sum is only assured on the maturity of the policy and as such your sum assured would be reduced to reflect how many years you had been paying into the policy. Likewise with the terminal bonus, say you surrendered 22 full years into a 25 year term, you would get a terminal bonus based on a 22 year policy.

A better option th an surrendering the policy would be to sell it. Endowment buyers will offer you more than the surrender value (upto 20% more depending on the contract) for a with profits policy. You won't however be able to find a buyer for unit-linked policies, there is simply no value in it for them as they fluctuate in value. Why would people want to but these policies? Well because they are actually good, low risk investments and the amount of future premium they will pay opposed to the potential returns make it worth their while. Well then, why do people want to sell? Because mainly they look at their target amount (and how much they were promised the policy would mature at by the person who sold the policy) and seeing the shortfall is excessive, they think they made a huge loss, whereas they actually have made a profit on how much they have paid in. Endowment buyers base their decisions purely on whether or not they are likely to make a profit from that point in time, not from 20 year s ago.

Can I make a complaint about the policy?

Yes! Although you need to be aware of exactly what you have issues with first of all. There are two approaches and you can take up neither, one or both of them and in no way whatsoever should it impact on the value of your policy, or the speed in which it is paid to you.

Complain about the selling of the policy Complain about the under-performance of the policy

To complain about the selling of the policy

If you feel the policy was mis-sold then you have the right to claim against the original selling agent. Were you:

Told an amount the policy would mature at Told you would be able to afford a nice holiday and have money in the bank when it matures Not told (or told the wrong thing) about the element of risk involved

If so, you should get in contact with your insurance provider and ask them to provide the name and address of the original selling agent along with their FSArefer ence number. You might think you know it already, however they might have been owned by a larger organisation so always check first. Once you have the FSAreference number, attempt to contact the seller of the policy and explain that you feel the policy was mis-sold. They are duty bound (and regulated) to get the matter resolved but if you are unhappy with what they present, you can then get in contact with the Financial Services Authority, quoting the FSA reference number and advising them that you would like to raise a mis-selling complaint. They will ask you if you have tried to contact the agent to get it resolved. If the FSA can't help you (maybe because of the date the policy was sold, or the agent has passed away) then all is not lost. Contact the FSCS (Financial Services Compensation Scheme) and try to raise a claim through them.

To complain about the performance of the policy

This one is a bit more tricky to approach, and a lot more tricky to win. If yo ur policy is with-profits then the insurance company could (rightly) blame the previous surrenderers of policies as the reason for recent dramatic fall in value. They are of course right and can likely back it up with a load of literature that you was provided with explaining the process. They will also have copies of the "Red Letters" they have sent in the past advising of a potential shortfall and asking you to contact them or a financial advisor. This would usually be enough for them to dismiss a claim of underperformance. If they have not sent you any "red letters" in the past then ask them to provide details of any sent, and where they were sent to. As an example, if you had changed address without advising them, then you would be responsible for that, but if you had notified them and they hadn't acted upon it then you could rightly claim as your notification of a shortfall had been mis-delivered.

Your chances of a claim are slightly increased if you have a unit- linked policy as they are the ones investing the funds for you. They do have a get-out clause though in that you can swap and change the funds as you see fit, so how it is invested is down to you or your financial advisor. They might offer a small token of apology, but don't expect it to cover your shortfall.

No-matter what, if you feel aggrieved about the performance, then by all means, lodge a complaint with them, they are duty bound to give it due consideration in a speedy time (they should respond within 5 days of receiving your written complaint) and all complaints have to be logged with the FSA. Be constructive in your criticism.

Contact details:

Financial services authority - Tel 0300 500 5000 - www.fsa.gov.uk/

Financial services compensation scheme - Tel 0800 678 1100 - www.fscs.org.uk/

2009 - David Worrall - Full publishing rights are allowed but give accreditation to http://www.estimatedwealth.co m

???????