Endowment Life Policies: A Growing Concern for Homebuyers

Millions of homebuyers are facing uncertainty regarding the future value of their endowment life policies, a situation exacerbated by recent warnings from insurance companies. Specifically, Royal Life wrote to 24,000 customers in April this year, informing them that their policies, taken out in 1991 and 1992, might not be enough to repay their mortgages. This news has sent shockwaves among the 7 million homebuyers repaying their home loans through endowment mortgages. Behind the warnings lies a concern over recent cuts in bonuses added to the value of life insurance and pension plans, which are crucial for providing enough cash to pay off mortgages.

Key Takeaways:

• Approximately 24,000 Royal Life customers took out low-cost endowment policies in 1991 and 1992, which might fall short of repaying their mortgages.
• Prudential has also warned some of its policyholders about potential shortfalls and increased premiums.
• Insurance companies have cut bonuses due to dramatic falls in interest rates, inflation, and investment returns.
• The average payout on a 25-year, £20-a-month, endowment policy was £37,585 in March 1993, based on actuarial firm Alexander Clay & Partners' figures.
• A 25-year, £20-a-month, endowment policy had an average yearly return of 12.6% as of March 1993.
• Homebuyers with short-term policies (10-15 years) could face problems earlier, but those with longer-running original policies might provide more than enough to clear the total loan.
• Policyholders can request illustrations from their insurance company, but these must be based on a growth rate of between 5 and 10% stipulated by Lautro, the life insurance industry regulator.
• Homeowners might be advised to switch to a with-profits fund to protect the accumulated value of their policy from a stock market crash.
• Suggestions are circulating in the investment industry and among lawyers that homeowners whose mortgages are not repaid by their endowment policies may be able to claim compensation if they were misled about the likely proceeds.

Statistics:

• Average payout on a 25-year, £20-a-month, endowment policy: £37,585 (March 1993)
• Average yearly return on a 25-year, £20-a-month, endowment policy: 12.6% (March 1993)
• Comparable average payout on a 25-year, £20-a-month, endowment policy in 1995: £38,827
• Comparable average yearly return on a 25-year, £20-a-month, endowment policy in 1995: 15.6%

Sources:

• "Millions of homebuyers had their expectations shaken earlier this year by warnings that some endowment life policies may not produce enough to pay off their loans" - GILLIAN BARTON
• "Royal Life wrote to around 24,000 customers who took out low-cost endowment policies in 1991 and 1992, with terms of 22 to 30 years, saying these might fall short of the amount needed to repay the mortgage" - GILLIAN BARTON
• "The average payout on a 25-year, £20-a-month, endowment policy was £37,585 in March 1993" - Alexander Clay & Partners