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2001

Endowment Inaction Could Leave You Homeless

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Endowment Inaction Could Leave You Homeless

If you’ve got an endowment policy you’ve probably had a letter. After all, about 10.7 million of them have been sent out.

But have you acted on it? According to the Financial Services Authority, at the last count 70% of recipients hadn’t.

Did you receive one of the 1.6 million red letters sent out? If you didn’t, it doesn’t mean your home is safe.

A red letter meant you were at the highest risk of a shortfall and needed your policy to grow by more than 8% a year to hit it’s target. That made it a must-act letter. Getting one of these meant you had a problem and you had to do something about it pronto.

But if you didn’t get one of those you might have got an amber letter. Around 31% of the letters sent out were amber. This means your policy has to have compound growth of more than 6% but less than 8% per year to achieve it’s original target.

Of course, that still leaves around 5.7 million letters which are classed as "green". That should be good news for those who receive them. Green means that the endowments in question should remain on track as long as they grow by 6% per year.

With a stockmarket that has spent the last eighteen months either falling or stagnating, even 6% returns cannot be counted on. Certainly it may be a temporary glitch, but if the current bear market lasts for any length of time, as those who remember the events of the early seventies are suggesting, then for anyone with less than 10 years remaining on their endowment a 6% per annum growth may seem like lottery returns.

Pessimism aside, whatever your view of the future and whatever the colour of your letter you have to make a decision. If that endowment policy is the only method you will have of paying back your mortgage, then it’s time to protect your home and your family by ensuring that the uncertainties of endowment returns don’t leave you without a roof over your head.

Because the ugly truth is that if your endowment policy doesn’t grow by enough to cover your mortgage, you’ll have to find the extra money from somewhere or your home may have to be sold to make up the difference. And that difference could be very big indeed.

Many of the insurance companies originally suggested you increase your monthly payments to make-up for possible future shortfalls. Whilst past performance may not be a guide to future returns, past under-performance seems like a damn good indicator of what you can expect.

The upshot of all this is that endowments are now viewed as risky, certainly more risky than many of the salesmen would have had you believe, and risk is bad.

Endowment shortfalls may not be as bad as is feared. Then again, they could actually be worse. How bad would things be if your policy grew by 4% a year, not 6%? The truth is we just don’t know. You don’t know, I don’t know and the people who "manage" your endowments don’t know. All we know is low interest rates and poor stockmarket returns equal little growth for endowments.

With so many people not knowing how your endowment policy will perform, is it worth taking the risk?

Is it worth gambling your home and your family's future security on what-ifs and maybes?

Or do you want to take steps to protect your home from endowment shortfalls?

 

Published Saturday September 1st 2001
 

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