Homeowners facing endowment shortfalls can cash in or sell their policies but here's another idea.
Last week I had an email from a Fool about an article we wrote on what to do about endowment shortfalls.
He happens to be an Independent Financial Adviser and suggested an alternative method of dealing with policies which are not expected to produce the amounts required to pay off the mortgage. He says this method hasn't been widely publicised but that with the right sort of endowment policy ('with profits' policies, not unit-linked), it's an option worth considering. It works like this:
First, make the policy 'paid up'. This means you don't pay any more premiums but any guarantees are locked up with the policy so that if there are any profits ie: bonuses, throughout the rest of the endowment term, they should be allocated to your policy on a proportionate basis.
The key phrasing to look for in your policy wording is 'basic sum assured' which is the minimum payout on maturity that the company guaranteed when you first took out the policy. This sum will be reduced proportionately if you stop paying the premiums but whatever the figure is, it's guaranteed as are all the bonuses that have already been allocated to your policy (as long as the company stays solvent!). He cites an example of how this would work in a real situation:
Let's say that you have a policy due to mature in 2013. The policy was supposed to produce £50k but now you learn that you face a £10K shortfall. The basic sum assured would have been, say, £17K and this 25-year policy has bonuses to date of, say, £10K. If the policy became paid up, then the basic sum assured would be reduced to roughly £10,200.
So even though you pay no more money in, you are guaranteed to receive £20,200 [£10,200 basic sum assured + £10k of bonuses already allocated] on maturity and, maybe, a little more on top. We figure that the return is around 5-7% net, not bad at all in today's environment! So on this imaginary £50K mortgage, £20,200 can remain interest-only, with the balance of £29,800 being switched to a repayment mortgage.
Bear in mind that if you make your policy paid up you will lose part of the life cover that came with it so it's essential you make alternative arrangements on that score before you take action on your policy. And if you take this route make sure you get a quotation first so you know exactly what you're getting or else get a fee-based financial adviser to do it for you. The Fool in question (Mark Meldon) appeared on BBC Radio's Moneybox Live programme on Monday to explain this method of dealing with a poor performing policy and you can read the transcript of the show if you'd like to know more.
Read more about what to do with Endowment Shortfalls
