Mortgage repayment vehicles - Endowments

Question 1

Standard Repayment Vehicles:

Answer 1

Full With-Profits endowment policy

Low-cost endowment policy

Unit-linked endowment policy

Individual Savings Account (ISA)

Personal Pension / Stakeholder Pension

Question 2

Endowment Policies:

Answer 2

All three guarantee to repay loan if policyholder dies

Will hopefully produce a sufficient value to repay the loan at the end of the policy term - in reality most have failed to do this.

Question 3

With-Profits Endowments

Answer 3

Guaranteed sum at end of policy

Pays a guaranteed sum if policyholder dies during term

Policy has a “Guaranteed Sum Assured” - will be paid to policyholder either on end of policy term, or on prior death.

Each year the profits should be distributed to policyholders but not guaranteed. The profits take two forms:

• Reversionary Bonus = Added to policy each year, cannot be taken away. Paid at maturity provided payments are maintained.
• Terminal Bonus = Added to policy value at maturity or on death - “loyalty bonus” - not guaranteed…

Question 4

Full with-profits endowment

Answer 4

Guaranteed sum assured will pay on maturity or death

Likely to be a significant surplus over the mortgage amount

Policy combines investment and life cover.

HOWEVER: Expensive & Inflexible (can’t be extended) and early surrender likely to lead to a loss.

Question 5

Low-Cost with-profits endowment

Answer 5

Guaranteed sum assured will be paid on maturity of the policy a percentage of the mortgage amount is therefore guaranteed to be repaid

Premiums lower than full endowment policy

Guaranteed death benefit = mortgage will be repaid on death

Any bonuses added cannot be taken away provided premiums are maintained

Possibility of a surplus over the mortgage amount paid to the holder.

No tax payable on maturity value

HOWEVER: Policy value at maturity may not repay loan, charges are hard to identify, many low-cost endowments have fallen short

Policy cannot be extended and may not be able to increase premiums.

Question 6

Unit-linked endowment

Answer 6

Mortgage related unit-linked endowments are reviewed periodically - checks if policy will repay mortgage - first review after 10 years then typically every 5 years and annually in last 5 years.

Flexible - payments can be varied, term can be extended.
Wide range of funds to invest in, transparent charges and easy to value.

No tax payable on maturity value

HOWEVER: No guaranteed value when policy matures, poor investment returns and volatile markets = missed targets. High charges can reduce growth.

Question 7

Unitised with-profit endowment

Answer 7

Unit-linked policy, investor buys units in a with-profits fund

Main difference = unit prices guaranteed NOT TO FALL

Policyholder usually has the option to switch between with-profits and unit-linked funds. When the annual bonus is declared, the unit price is increased accordingly.

Market Value Adjuster - surrenders and switches out may trigger MVA - protects other investors and are applied in times of poor fund performance or stock market crashes

Question 8

Endowment Shortfalls

Answer 8

Red / Amber / Green warnings to take action

Each plan must be reviewed every 2 years when used as a mortgage repayment vehicle

FCA factsheets are provided with letters to endowment policyholders to list options available

Mortgage advisers should not advise on investments