by Mark Johnston
Endowment Policies Fall Short!
In the 1980s and early 1990s millions of home buyers took out endowment policies. These policies were routinely sold by commission hungry financial advisers.
Endowment policies were designed to pay off home loans. Home buyers took out an interest only mortgage, then they saved money in an endowment policy, which was supposed to pay off the capital of the mortgage after 25 years.
At the end of the 1980s there was a boom in both the housing market and the stock market, which prompted those selling these products to make very high predictions of investment growth in endowment saving plans.
However, by the middle of the 1990s it became obvious that these expectations were way overblown.
Therefore, high charges and falling stock returns have left many policyholders sorely disappointed.
Due to falls in the stock market a collapse in sales followed and more recently many policyholders have demanded compensation as they believe they were mis-sold a product.
Between 2000 and 2006, endowment companies paid out around £2.6 billion in compensation after receiving more than 1.8 million complaints about mis-selling.
Patrick Connelly of financial advisers AWD Chase De Vere, said “endowment policies have never recovered from the 2000-2003 crash in the stock market”.
Recent figures from Legal and General, the insurance firm, show that April 2013 will see a spike in the number of endowment maturities.
It therefore seems then that hundreds of thousands of home owners with endowment policies ending this year will find that their policies will produce too little to repay the loan on their home. This is despite a recovery in the stock market during 2012.
Current data has also revealed that some 100,000 Standard Life endowment policies will mature this year, however their payouts are reported to be down 2.25 per cent compared to last year.
Scottish Widow, part of the Lloyds banking group, has nearly 14,000 policies due to mature this year, although these too are expected to also miss their target to provide sufficient money to pay off any mortgages. These payouts are down 6.5 per cent on last year.
The worst policies, such as those from National Provident, are now paying out as little as £21,086.
Many insurers have blamed falling returns on shares and bonds over the past quarter of a century for low payouts. They have however argued that savers in endowments have still done better than if they had saved their money with a building society.
Although, figures provided by Nationwide building society suggests otherwise, they show that if home buyers had simply put £50 a month in to the best savings account it would now be worth £31,340 which is more than most policies are paying out at the moment.
Mike Connolly, a Legal and General spokesman, said “policyholders will have been warned that their investments were not going to meet their targets and should have been advised to either top up the funds or make alternative arrangements”.
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