Topic 17 - Using Endowment Policies for Mortgage Repayment Flashcards
Endowment plans are composed of two parts. What are these?
Life assurance - guarantees to pay the sum assured if the borrower dies during the term.
Investment element - targeted to provide a maturity value sufficient to repay the loan in full at the end of the term and provide a surplus for the borrower.
Where are premiums invested in a with-profits fund?
- Blue-chip shares
- Gilts
- Bonds
- Cash
The with-profits fund is assessed annually and money is set aside to:
- Covert current and future liabilities e.g. death benefits
- Cover admin expenses related to the fund
-Provide a reserve
Smoothing:
Bonuses may not be paid in years when the fund performance would not normally justify these.
Smoothing is creating a reserve in years of good growth so that it may still be possible to pay a bonus in poorer years.
What happens if the plan is surrendered before the end of the term?
Actuaries will calculate the surrender value.
GSA:
Guaranteed sum assured. The amount that is paid on maturity or death.
Joint life first death policy:
Pays out on maturity or when the first of the lives assured dies during the term.
Reversionary bonuses:
Added to the policy as a percentage of the plan’s GSA. They are guaranteed to be paid on maturity.
They can be paid on a simple, compound or combined bonus basis.
Terminal bonuses:
Added at maturity, or sometimes at death. They are designed to reward longstanding policyholders. They are paid at the discretion of the company.
Charges for unit-linked endowments:
- Stated monthly policy fee of £2 - £3 a month.
- The costs of managing the fund.
- If the policyholder cashes in the plan early, the policy might incur a market value adjuster (MVA) where it reduces the value of units transferred to protect other investors.
Disadvantages of full with-profits endowments:
- Likely to be more expensive than a repayment mortgage
- Inflexible - the term cannot be extended and early surrender is likely to result in a payment below the plan’s real value.
Disadvantages of low-cost with-profits endowments:
- Final value not guaranteed to pay off mortgage
- Often difficult to identify product charges
- Inflexible policies
What is the offer price in a unit-linked endowment?
The price at which the policyholder buys units.
What is the bid price in a unit-linked endowment?
The price at which units are bought back by the fund: the maturity or surrender value.
Units in a unit-linked fund are used to pay for what?
Life cover, admin and benefits.
What is the most common investment made in unit-linked funds?
Managed ones composed of blue-chip equities and gilts. It produces reasonable capital growth without taking excessive risks.
Charges on a unit-linked plan
- Initial charge
- Monthly management fee
- Annual management charge
- Early surrender charge
- Charges deducted by cancelling units
Unitised with-profits endowments combine what?
The security of a with-profits policy with the greater growth potential of a unit-linked one.
What are the two types of units in a unitised with-profits fund?
- Variable
- Fixed
Endowments taken out from 6 April 2013 are what?
Non-qualifying if the annual premiums exceed £3,600.
This means gains on them are subject to income tax.
How often are reviews required for endowment plans used as mortgage repayment vehicles?
Every 2 years.
What actions can an endowment policyholder take on review if the pay-out will not cover their mortgage?
- Switch projected shortfall to capital repayment
- Convert the whole mortgage to a capital repayment basis
- Accumulate savings and use these to reduce the mortgage debt
- Extend the term
- Early repayment
What are the grounds for a complaint with regards to endowments?
- The adviser did not explain that it would not necessarily mature with sufficient funds
- The maturity is after the agreed redemption date of the mortgage
- The maturity is after the policyholder’s selected retirement date
- The adviser recommend an existing policy be surrendered and replaced with a new one
