Endowment failing? Bite the bullet NOW (General Comments)

Member Name: opinions4u

Product:	General Comments
Date:	21/09/02 (680 review reads)
Rating:

Advantages: Dealing with it now avoids the problems getting bigger and bigger

Disadvantages: It will cost you more every month

If you hold an endowment mortgage, there is a reasonable chance that you have had a letter from your life assurance company suggesting that it may not succeed in getting the returns on your money required to repay your loan in full.

Even Standard Life, who in 1999 issued a guarantee that all policies would mature to a level high enough to repay the mortgage covered by the policy, are now admitting that this is a promise they cannot keep.

So, what can you do about it?

Firstly, it is wise to establish that you were sold the policy correctly in the first place. Examples of mis-selling vary, but policy terms that take you in to retirement, sales to single people with no dependents or simply failing to explain the potential risks that a policy does not guarantee mortgage repayment could give you a case. If you bought the policy after 1988, the Financial Services Act should protect you. Even if you bought the policy before then, many companies will consider your claim in the same way.

What are you entitled to? Well, this will vary from individual to individual. Effectively, you should approach the life assurance company first and ask them why the policy was sold to you. They should hold documentation supporting the sale. If this documentation stacks up, your case is likely to fail. But if the reasons for sale are not made clear (very possible if a salesman didn't do his paperwork properly) the life assurance company may well compensate you in a way that effectively returns you to the position that you would have been in had you taken a repayment mortgage.

One thing you cannot get compensation for is, however, poor investment performance. Assuming the salesman made you aware that the value of a unit-linked plan could go up or down (or that a with profits plan is not guaranteed to meet its objective) it is highly unlikely you will be compensated. Irritating, given the wonderful graphs and tables of past performance
you were shown. Infuriating when you work out how much of your money has gone to pay the wages of the salesman and a fund manager who could have got better returns sticking your money in his own bank account earning 0.1% interest!

Okay, assuming you were sold the policy correctly but the fund performance looks to be inadequate what choice do you have?

Well, you could sit tight and hope for the best. After all, markets go up and down and past performance has still produced great returns. Personally, this is leaving a lot to chance and you really do not want to get to year 25 of your home loan and still have several thousand pounds owing. Unfortunately, facing the situation and finding more money each month to deal with this issue is probably the best solution.

You could, as the life assurance company will probably suggest, increase your premiums to the life assurance policy. While based on past performance this should be a good idea, there is more than a feeling that you could be throwing good money after bad.

A similar alternative is to take out a separate investment plan such as a regular savings stocks and shares ISA while retaining existing contributions to your endowment plan. While this is very reliant on stock market returns, those considering the stock market to be low but volatile will often recommend that you invest a little but often. So, £50 a month in a CAT standard product (such as M&S, Halifax or Abbey National) is an option. Again, my gut instinct is away from this. Times are uncertain and I am looking for guarantees.

Perhaps the best option available is the most expensive one too. But certainly the one to go for if you can afford it. Keep your endowment policy going as a completely independent form of investment and life cover and switch your mortgage to a full repayment basis. Although your monthly payments will rise significantly, you have a guarantee that your mortgage will be fully repaid i
f you maintain the payments or die! Additionally, any proceeds from the policy at maturity are yours to spend as you wish. For many, it will pay for children to go in to higher education. The choice is yours.

There is a half way house that works on the same principle. If you have, for example, a £50,000 endowment loan and a letter saying your policy may only mature to £40,000, you could switch to a part endowment / part repayment mortgage. In other words, increase your monthly payments to a level that will reduce your debt to £40,000 at the end of the term and let the endowment policy take care of the £40,000. This is more affordable than the option above and while it still relies heavily on the performance of the policy, you are certainly offsetting many of the risks involved. The level of reliance on the policy is best decided by finding the balance between the expectation you have from the policy and the needs of your wallet. Many will go half and half, in other words £25,000 endowment and £25,000 repayment, based on this example.

Again, these options may not be suitable for you. You may need to give up on the policy altogether. Please do not take this decision lightly. Those who make most from endowment plans are those who keep going to maturity. But, if needs must, you have choices again! Whichever choice, ensure you switch your mortgage to a repayment basis! Those who forget to might not realise their mistake until year 25 is reached!

You could surrender the policy to the life assurance company and get a lump sum back. This will usually be poor value, as charges and commissions have been deducted from the plan, a problem compounded by poor returns. But, you can then consider what to do with your lump sum. Ideally, reduce debt. This is what you took the policy out to do. So any proceeds should be used to pay off other credit. If you do not have any, reduce the mortgage! While you still have the option of a visit t
o the
Trafford Centre for a wild shop, it really is not a good idea! And do not forget to arrange replacement life cover if you need it.

If your surrender value is more than £2,000 and you hold a with profits policy, you could sell it. Check Channel 4 teletext money pages (index P490) for details of companies that trade endowments. You can usually attract between 10% and 30% more than the surrender value, so it is worth the effort! Again, do not forget to sort out new life cover now your existing policy has gone.

A rarely used option is to make the policy paid up. This is a way of stopping your premiums now, but retaining a reduced level of investment and life cover. In other words, you still get a lump sum at the maturity date, albeit for a significantly reduced amount. What you will not get is a surrender value now though. You will still need to arrange additional life cover if appropriate, but at a lower level as your existing policy will still provide some protection. This is probably preferable to surrender in most cases.

Are there any other catches? Well, your mortgage lender may charge a fee, typically £50, to amend your loan. Personally, I think this is a disgraceful approach, profiteering from the advice of a broker who place business with them, or from the advice of their own staff. If they do want to charge a fee, ask them to waive it. If they refuse, threaten to remortgage. Perhaps you should remortgage anyway and use the savings made to help reduce the pain!

There is no great solution to the problem. Bury your head in the sand and do nothing or dig in to your pocket and find more money each month. In a perfect world, take independent financial advice on the matter. Alternatively, go directly to your mortgage lender and ask them for guidance. While they may not give specific advice, they should be able to clarify your options, backed up with specific costing for each course of action open to you.
Just bewar
e any attempts to sell you top up policies!

Good luck.

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