endowment policy


B

BB

Oh no not them again!!
Hi
I have a mortgage endowment policy. No mortgage.
Taken out '91 for 70K.
Apparently I've paid in 19.6K and it's value now is 24.6K.
Two questions.
Given monthly payments of £97.60 how do I work out what the rough annual
interest is for comparison purposes? I assume it's compounded but the voice
at the other end of the phone didn't understand compound vs simple. Bit
worrying I thought.
And is it really worth going on with it or would I be better to get what I
can and put it in a high interest account? I know this would be speculation
but an informed judgement welcome.
Oh due to mature 2016.
Cheers BB
 
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M

Mouse

Oh no not them again!!
Hi
I have a mortgage endowment policy. No mortgage.
Taken out '91 for 70K.
Apparently I've paid in 19.6K and it's value now is 24.6K.
Two questions.
Given monthly payments of £97.60 how do I work out what the rough annual
interest is for comparison purposes? I assume it's compounded but the voice
at the other end of the phone didn't understand compound vs simple. Bit
worrying I thought.
And is it really worth going on with it or would I be better to get what I
can and put it in a high interest account? I know this would be speculation
but an informed judgement welcome.
Oh due to mature 2016.
Cheers BB
Since this was taken out in 1991 and you are quoting a "value now"
rather than mentioning bonuses, I assume you have a unit linked
endowment.

I'm too lazy to get into the maths - sorry - but depending on your
circumstances rate of return might not be the only consideration.

It isn't usually a good idea to keep an endowment solely for the life
cover, but in some (admittedly rather rare) circumstances you might
want to consider it. In particular, if: you have dependents, you have
no other life cover, you have insufficient assets elsewhere to provide
for your dependents after your death, and your health has changed
sufficiently since 1991 for it to be difficult for you to obtain life
cover elsewhere, you should think very carefully before giving up the
life cover that goes with the endowment.

1991 is kind of early for this, but you might find that your policy
includes other benefits - critical illness cover, waiver of premium
benefit etc - and if you need them, think about how you'll replace
them before you cancel anything.

Unless you are a higher rate taxpayer this won't be a concern, but
most endowments are taken out as "qualifying" for tax purposes,
meaning that you don't have any personal liability to tax on the
proceeds. Unit linked endowment policies often don't produce enough
of a gain for this to be an issue, but if you are a HRT you might want
to look into this some more - there's no point moving your money to
somewhere where it gets a higher headline rate only to lose your gains
to HMRC.

Even if I wasn't being lazy on the maths, it's hard to work out the
rate of return on the information you've posted. For starters, some
of that £97.60 per month will be for the life cover. If you need the
life cover, you might want to deduct that cost from the premium before
you work out rate of return. (Very occasionally you'll come across an
endowment policy that appears to have a negative rate of return -
that's usually because the policyholders are either very old or in
very poor health, and the life cover is a huge percentage of the
premium).

An average rate of return may not even be all that helpful to you -
both interest rates and return on investments have been higher in the
1990s than they are now, so an average rate might show that your
policy performed very well (or indeed very badly) during the 90s
without saying anything at all about what it might do now. (Obviously
past performance not a guide to the future etc etc, but average past
performance over the last 17 years can be even less of a guide than
past performance over the last two or three years).

One thing that might be helpful to you is to get hold of the unit
price of the fund your endowment is invested in at various points over
the last, say, 1 to 5 years. Ignoring charges/life cover/etc, that
will give you some idea of the rate of return. In addition, different
life offices have different strengths and weaknesses, and some are
rather more solid than others.

Mouse.
 
M

Martin

Oh no not them again!!
Hi
I have a mortgage endowment policy. No mortgage.
Taken out '91 for 70K.
Apparently I've paid in 19.6K and it's value now is 24.6K.
Two questions.
Given monthly payments of £97.60 how do I work out what the rough annual
interest is for comparison purposes? I assume it's compounded but the
voice
at the other end of the phone didn't understand compound vs simple. Bit
worrying I thought.
And is it really worth going on with it or would I be better to get what I
can and put it in a high interest account? I know this would be
speculation
but an informed judgement welcome.
Oh due to mature 2016.
Cheers BB
Since this was taken out in 1991 and you are quoting a "value now"
rather than mentioning bonuses, I assume you have a unit linked
endowment.

I'm too lazy to get into the maths - sorry - but depending on your
circumstances rate of return might not be the only consideration.

It isn't usually a good idea to keep an endowment solely for the life
cover, but in some (admittedly rather rare) circumstances you might
want to consider it. In particular, if: you have dependents, you have
no other life cover, you have insufficient assets elsewhere to provide
for your dependents after your death, and your health has changed
sufficiently since 1991 for it to be difficult for you to obtain life
cover elsewhere, you should think very carefully before giving up the
life cover that goes with the endowment.

1991 is kind of early for this, but you might find that your policy
includes other benefits - critical illness cover, waiver of premium
benefit etc - and if you need them, think about how you'll replace
them before you cancel anything.

Unless you are a higher rate taxpayer this won't be a concern, but
most endowments are taken out as "qualifying" for tax purposes,
meaning that you don't have any personal liability to tax on the
proceeds. Unit linked endowment policies often don't produce enough
of a gain for this to be an issue, but if you are a HRT you might want
to look into this some more - there's no point moving your money to
somewhere where it gets a higher headline rate only to lose your gains
to HMRC.

Even if I wasn't being lazy on the maths, it's hard to work out the
rate of return on the information you've posted. For starters, some
of that £97.60 per month will be for the life cover. If you need the
life cover, you might want to deduct that cost from the premium before
you work out rate of return. (Very occasionally you'll come across an
endowment policy that appears to have a negative rate of return -
that's usually because the policyholders are either very old or in
very poor health, and the life cover is a huge percentage of the
premium).

An average rate of return may not even be all that helpful to you -
both interest rates and return on investments have been higher in the
1990s than they are now, so an average rate might show that your
policy performed very well (or indeed very badly) during the 90s
without saying anything at all about what it might do now. (Obviously
past performance not a guide to the future etc etc, but average past
performance over the last 17 years can be even less of a guide than
past performance over the last two or three years).

One thing that might be helpful to you is to get hold of the unit
price of the fund your endowment is invested in at various points over
the last, say, 1 to 5 years. Ignoring charges/life cover/etc, that
will give you some idea of the rate of return. In addition, different
life offices have different strengths and weaknesses, and some are
rather more solid than others.

Mouse.

######################

Sparing no blushes, great stuff ! With so many newsgroup postings
continuing to deteriorate, it's really refreshing to see such a
comprehensive and well written post.
 
B

BB

Martin said:
Since this was taken out in 1991 and you are quoting a "value now"
rather than mentioning bonuses, I assume you have a unit linked
endowment.

I'm too lazy to get into the maths - sorry - but depending on your
circumstances rate of return might not be the only consideration.

It isn't usually a good idea to keep an endowment solely for the life
cover, but in some (admittedly rather rare) circumstances you might
want to consider it. In particular, if: you have dependents, you have
no other life cover, you have insufficient assets elsewhere to provide
for your dependents after your death, and your health has changed
sufficiently since 1991 for it to be difficult for you to obtain life
cover elsewhere, you should think very carefully before giving up the
life cover that goes with the endowment.

1991 is kind of early for this, but you might find that your policy
includes other benefits - critical illness cover, waiver of premium
benefit etc - and if you need them, think about how you'll replace
them before you cancel anything.

Unless you are a higher rate taxpayer this won't be a concern, but
most endowments are taken out as "qualifying" for tax purposes,
meaning that you don't have any personal liability to tax on the
proceeds. Unit linked endowment policies often don't produce enough
of a gain for this to be an issue, but if you are a HRT you might want
to look into this some more - there's no point moving your money to
somewhere where it gets a higher headline rate only to lose your gains
to HMRC.

Even if I wasn't being lazy on the maths, it's hard to work out the
rate of return on the information you've posted. For starters, some
of that £97.60 per month will be for the life cover. If you need the
life cover, you might want to deduct that cost from the premium before
you work out rate of return. (Very occasionally you'll come across an
endowment policy that appears to have a negative rate of return -
that's usually because the policyholders are either very old or in
very poor health, and the life cover is a huge percentage of the
premium).

An average rate of return may not even be all that helpful to you -
both interest rates and return on investments have been higher in the
1990s than they are now, so an average rate might show that your
policy performed very well (or indeed very badly) during the 90s
without saying anything at all about what it might do now. (Obviously
past performance not a guide to the future etc etc, but average past
performance over the last 17 years can be even less of a guide than
past performance over the last two or three years).

One thing that might be helpful to you is to get hold of the unit
price of the fund your endowment is invested in at various points over
the last, say, 1 to 5 years. Ignoring charges/life cover/etc, that
will give you some idea of the rate of return. In addition, different
life offices have different strengths and weaknesses, and some are
rather more solid than others.

Mouse.

######################

Sparing no blushes, great stuff ! With so many newsgroup postings
continuing to deteriorate, it's really refreshing to see such a
comprehensive and well written post.
Cheers me dears.
A lot there to digest and think about.
I'll take it apart a bit at a time.
Ta
BB
 
R

Ronald Raygun

Mouse said:
Since this was taken out in 1991 and you are quoting a "value now"
rather than mentioning bonuses, I assume you have a unit linked
endowment.

I'm too lazy to get into the maths - sorry
That's a pity, since the maths is really what the OP was asking about.
But you're right, the points you list (now snipped) are important to
think about, and so perhaps the OP should have been asking something
else. But he didn't, and the answer he asked for is probably worth
giving even if it doesn't perhaps tell the whole story.
Even if I wasn't being lazy on the maths, it's hard to work out the
rate of return on the information you've posted. For starters, some
of that £97.60 per month will be for the life cover. If you need the
life cover, you might want to deduct that cost from the premium before
you work out rate of return.
Reading between the OP's lines, I would incline to the conclusion that
he has no need for the life cover, and so he is basically throwing away
the cost of life cover in order to buy into whatever the tax benefits
are of having an investment linked to a qualifying policy.

It should be easy enough to discover (by looking at his annual statements)
what the cost of life cover is. I would guess that it's about a quarter
of the premiums. This means that the rate of return on the 75% which is
invested needs to be higher (to make up for the 25% thrown away) than
that for any alternative form of investment into which he might consider
switching 100% of his future premiums (if indeed he even wants to carry
on investing a fixed monthly sum).

Direct investments might lose him some return if it's taxed, and this
partly compensates for the wasted cost of life cover, but he could fight
off the tax in other ways, such as by channeling future investments
through an ISA.
An average rate of return may not even be all that helpful to you -
both interest rates and return on investments have been higher in the
1990s than they are now, so an average rate might show that your
policy performed very well (or indeed very badly) during the 90s
without saying anything at all about what it might do now.
Quite true, but even though it may not be too helpful, it's bound to be
in some sense interesting.

As for the maths, what we would do is apply the fiction of uniform
monthly growth. So if one were to expect, say, 7% annual growth,
the monthly growth factor would be f=1.07^(1/12).

If he invests a premium p monthly for 300 months, then 300 months
after making the first payment, his investment should be worth
p*f*(f^300-1)/(f-1).

This formula is not straightforward to solve for f, but it can be
done either iteratively, or graphically by plotting the value of
the investment for fixed values of p and 300, as a function of f,
and seeing for which value of f we get a particular fund value.

Hoping to get £70k after 300 months of investing £97.60pm requires
an effective rate of return of about 6.37%pa. That's what the
investment is "worth" to him. The actual rate of return needed on
the basis of investing only 3/4 of the premiums is 8.29%pa.

On the latter basis, the fund value after the 201 payments he has
now made (201*97.60 = about 19.6k) should be £30943. Since it
only stands at £24600, it hasn't been getting the 8.29% hoped for,
but only about 5.83%.

If growth were to continue at 5.83%pa for the remaining 99 months of
the term, his existing £24600 should grow to 1.0583^(99/12) times
that value (i.e. £39261) and if he continues to pay 99 more tranches
of £97.60pm (of which 75% is invested at the same rate), this would
contribute a further £9260. He'd get £48521. Not bad, considering
he really wanted £70k.

It's also worth pointing out that the aforementioned £9260 is *less*
than 99*£97.60, so it would be daft to continue paying in. So an
option is to make the policy paid-up, i.e. to cease paying premiums
but to leave the £24600 in there to grow.

Whether the investment return will be better or worse than 5.83% is
anybody's guess, but with an ordinary high-interest cash account he'd
be struggling to match that. Could just cash in the £25k and buy a
yacht.
 
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B

BB

Could just cash in the £25k and buy a yacht.
Ta again.
Printing off and taking to pub to read.
Be a small yacht for 25K and I get sea sick. Why did I do my day skipper?
BB
 
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