The Benefits And Pitfalls Of An Endowment Loan

Endowment mortgage loans are one of the most controversial types of loans, and have received good and bad press in equal measure. If you are looking for a mortgage loan, then you should look at an endowment mortgage loan as one option. Despite these loans being quite popular, they can be complex to understand.

What are endowment loans?

The first part is an interest-only mortgage loan that works like any other mortgage of this type. However, combined with this is an endowment policy that you set up and mature in order to pay off the mortgage at the end of the loan term. The policy is set up to grow enough to pay off the amount you borrow.

Benefits of an endowment loan

This can reduce the cost of your mortgage loan whilst still keeping your payments low.

Pitfalls of an endowment loan

Although the interest-only loan will reduce your monthly payments, paying off only the interest means you are paying money without reducing your debt in any way. And you are still paying money into an investment fund so your monthly payments are more than just the interest. Many people are finding themselves in a situation where there is a shortfall in the policy and they are unable to pay off the mortgage in full.

repayment loan

The major alternative to an endowment loan is the traditional repayment loan, where you pay off the loan and interest each month until the entire amount is repaid. However, during times when inflation is increasing an endowment loan is a good idea, as the risk is reduced and you can benefit from lower payments each month.

These are usually associated with mortgages. They have recently come under criticism because returns are lower than were expected a few years ago and some holders are being notified that their policy is now unlikely to produce enough money to pay off the mortgage when it becomes due.

To spread the risk, you can invest in second hand endowments via a specialist investment trust.

Maximum investment plans

This is a fancy name for what is actually an endowment policy do not be deceived into thinking it is something else.

Independent financial advisers and stockbrokers offer broker funds to their clients. These are investments in the funds of a life assurance company where the broker makes the allocation over the individual funds for you.

Originally investments were 'fettered' to the funds of the chosen life company, which meant they were akin to 'fund of funds' investments, except that there the life company makes the allocations.

However, many are now 'unfettered', i.e. they permit investment in other life companies' funds, unit trusts and even individual shares.

The advantage claimed for broker funds is that the IFA/broker has extra expertise in the allocation decision, enough to more than compensate for the higher costs (but costs are not necessarily doubled because there will be some discounting of costs between the two parties).

Read more detailed reviews at legal and general endowment, yale university endowment, and endownment policies

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Possibilities of happening with Endowments Mortgage

Customarily insurance companies make presentation of worked out value of endowment mortgage policies on maturity with specifics terms that you want. It goes perfectly right to make out such projections. Insurance companies try to work up illustrations taking average economic growth and stock performances. These projected illustrations never take risk side of the issue that is equally possible. But, one can always say and has to go out for any venture based on positive outcomes. Any positive or negative assertion is only a possibility, may or may not be a fact, that too in distant futures as 15 or 20 years or more. Important to remember is endowment mortgage you are taking is not a guarantee of returns on maturity as projected. This is for the reasons that future can not be predicted, many unforeseen things may happen in long span, and many statutory amendments may take place.

Rate of interest is one big influencing factor that triggers whole set of alterations in stock markets. Economic health of a country steers rate of interest which is dependent upon rate of growth. Under a high projected rate of growth, stock market response in regards to investments will show up higher returns. That is an effect we can feel in every days market. With lower rate of interest, stock markets bring in lot on investment. Thus infused capital sets in higher race for stocks because of competition for stock acquirement. Naturally, those who have invested in stocks are gainers. It is obvious that your investment in endowment mortgage policies will make gains to be further distributed within policies. Not out of context to say that more people will be naturally interested in such policies and in turn insurance companies will go for higher rate of premiums because higher cost of linked factors.

In normal cases markets keep fluctuating, and in longer periods positive gains and negative gains compensate the accruals. An overall situation of economic growth acts as final rider to affect maturity value of policies. Older policies therefore, show better position in respect of covering your repayment than newer policies. Newer policies pass through less time to get compensated effect of market fluctuations and attract notice of likely shortfall in red or amber colour coded letters.

As remedial steps there are a few alternatives you can take. Most easy and spontaneously possible action you can take is paying a single large amount as may be possible as payment back to mortgage loan, but ensure if this is going to attract any penalty from lenders side pursuing loan agreement. Extending term of your endowment policy is another way out, necessarily keeping it within your retirement age. However, you need to check if the lender agrees to it. A convenient option is to enhance monthly repayments to the lender to cover interest and part of your principal amount. There can be a possibility of increasing your payment to existing policy, which is subject to regulatory provisions; you may even go for additional endowment policy.
Endowment Mortgages
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Endowment Plan in Life Insurance

Endowment plans were very popular in the past mainly because there were hardly any options available in the market. The popularity of such policies could also have been because of the guaranteed returns assured by the insurance providers. But with time this type of policy has lost its popularity with so many players in the market and new innovative products have taken over the insurance industry by surprise.

The insurance companies in this reference act like brokers to you, they invest your money in the market and share the returns with you. Such types of plans are long term plans which cover life. If you expire during the tenure of the policy, the sum insured plus the accumulated bonuses is payable to the nominee or beneficiary. Special feature of the plan is that even on survival the policy holder is payable by the insurance company.

But it is surprising that the investments made by the insurance companies lack transparency and you have no control over the investment made by the companies. You have no idea where the money is being invested and how much and so on. The insurer has monopoly position over the policy holders here.
The plan has a competition now, with private players in the market Unit Linked Plan has been introduced.

The premium for Endowment Plan is significantly higher than any other type of Term life insurance plans for the same amount of sum assured because it is insurance plus investment plan clubbed together offering a wider option to the consumers.

If you have been reading the financial press you may already know this.

And if you have recently received a Red Letter from your endowment mortgage lender then you will already certainly know! So what do you do now? You must act promptly to ensure you can meet the potential shortfall when your endowment matures.

You may be unhappy with the way your policy was sold to you in the first place, and you would be in good company if you were, as hundreds of thousands of people have been and are taking steps against their endowment company. If this applies to you too, you do have a right to make a complaint, providing that you do something about it and complain within three years of receiving your first Red Letter.

Explain your situation and tell them that you wish to make a formal complaint.

In Britain you can also discuss the matter with the Citizen's Advice Bureau and you can visit their website at www.citizensadvice.org.uk or you can try the Financial Services Authority, their web site is www.fas.gov.uk/consumer.

If you reside outside the United Kingdom and suspect you have the same problem, the first thing you must do is to check if the endowment policy you have will be sufficient to cover your mortgage when it matures. If you find that it isn't, then make sure that you do something about it now before it is too late, and thus ensure that you don't have a serious problem somewhere further down the line.

Read another reviews about meaning of endowment, Harvard endowment fund, and selling an endowment policy.

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Endowment Policies - Everything You Need to Know

There really is no easy way to describe an endowment policy without going into the complexities of how and why they work, so some of this might be difficult to read, however I'm going to stay away from legal terms/jargon as much as possible and give you straight facts in plain English.

First let us discuss what an endowment policy is. An endowment policy essentially, is a life insurance policy with an element of investment. It is not a mortgage. Endowment policies were generally sold to pay off mortgages but in the vast majority of cases, the insurance company and the mortgagor are two separate companies. Usually endowments were sold to run alongside the mortgage, where the lender paid off the interest and used the proceeds from the endowment to pay the capital sum (the amount actually borrowed).

One would be taken out to insure your life for the amount of capital and the investment would be used to pay off the mortgage capital, should the policy holder/s survive the term of the contract.

What this means is that a proportion of your monthly premium is going towards the life cover, with the remainder towards the investment. Providing your policy matures "on-track" you will have paid off your capital sum when the term has run.

Unfortunately, most (if not all) endowments are now falling short of their target amount.

Two define endowment policies we would need to create two sub-categories as the two types run in completely different ways.

* Unit-linked policies * With-profits policies

Unit linked

A unit-linked policy is invested in the stock market, all the funds which can be invested in (each fund being a portfolio of different shares, properties or equities) are controlled by a fund manager and your investment will rise and fall in line with the stock market or inflation, depending on the fund choice.

The fund manager is the person responsible for trying to get you the best return on your investment, however, you can change funds at any time so if one fund is not performing, or has hit its peak, you can change into a different fund.

The potential risks on with-profits policies are minimised by the fund manager spreading the fund amongst a number of different companies so that if one has a bad time, the overall fund would barely feel it. Counterpoint to that though is that if a company produces amazing results, any potential gains would be barely felt too.

Due to the spread, the fund should rise (or fall) in line with the overall performance of the stockmarket.

With profits

With-profits policies are not directly affected by any stock market fluctuations (although if the economic climate is on a downturn, the need for money heightens for policy holders and this can affect the with-profits policies), and are relatively stable in comparison with unit-linked policies.

With-profits are based on how the company as a whole is performing. A percentage of the profits the company makes gets passed onto the with-profits members through bonuses. These bonuses get paid yearly and at the very end of the term.

As with unit-linked policies, a proportion of your premium is used as life insurance, and the rest is used for the investment.

As a quick guide to with-profits policies, you need to be aware of the following terms:

* Sum assured - This is the cash amount that you have been guaranteed to make off the policy from the outset providing it matures. * Reversionary bonuses - These are the bonuses that get applied to your policy on an annual basis. * Terminal bonus - This is the bonus that gets applied to your policy when it is exited.

Find out what your Sum Assured is and add it to the amount of reversionary bonuses you have had to date. This figure will be your worst case scenario. These figures are guaranteed (providing the policy matures).

What invariable affects the value that your policy matures at will be the terminal bonus. This is a percentage figure and is added to the total of the sum assured and reversionary bonuses applied to date. When you see the value of your policy dropping, it is the terminal bonus that's causing this.

To give you an idea of how the terminal bonus has dropped over the last 10 years I can quote one insurance company I recently called, I'm sure they are neither the best nor worst performers but I'm using them as an example. This is for a 25-year term.

1. Terminal bonus 2009 - 15% 2. Terminal bonus 2000 - 175%

Now if I gave you some rough figures here, you will see just how much of a difference this has made to the maturing value of a policy. We will use exactly the same example but maturing 9 years apart.

* Target amount - £50,000 * Sum assured - £20,000 * Reversionary bonuses - £10,250 * Terminal bonus (15% of sum assured + reversionary bonuses) - £4,537.50 * Total maturity value - £34,785.50 * Shortfall of - £15,214.50

And now if that policy was maturing 9 years ago:

* Target amount - £50,000 * Sum assured - £20,000 * Reversionary bonuses - £10,250 * Terminal bonus (175% of sum assured + reversionary bonuses) - £52,937.50 * Total maturity value - £83,187.50 * Excess of - £33,187.50

As you can see, on an average £50,000 policy, the difference in the maturity values over the last 9 years amount to £48,402.

Now by now you might very well be thinking of calling your insurance company and asking them what the hell they are playing at. But before you do let me tell you why these with-profits policies are not hitting target right now (and likely never will again). It's because of people surrendering the policies early. You see, the performance of these funds is based on the amount of money in the fund. As more and more people cash in their money early (therefore not allowing for the desired level of growth) more money is taken out of the with-profits pot.

These policies are failing because of the people surrendering the policy early, taking their money and running.

What to do with these policies

Well you do have a number of options.

* Leave the policy to mature * Surrender it early * Sell it * Complain

You can leave the policy to mature. If you have a unit-linked policy then on the day of the maturity, the value of the fund will be locked in and paid out to you. If your policy is with-profits, the terminal bonus on the date of maturity will get applied and the policy will be paid out. Please be aware that the terminal bonus rate can change at any time though and it might be that you are unlucky and it changes the day your policy matures. It may even be taken away completely and you would be left with the worst case scenario as I mentioned earlier.

You can, of course, surrender the policy early. There should be no penalty for surrendering it early (unless possibly you are in a with-profits fund in a unit linked policy), however with a with profits policy your values are going to be reduced. As in the example we went through earlier, if your sum assured was £20,000 then you would expect to get £20,000 if you surrendered the policy on the second day would you? This sum is only assured on the maturity of the policy and as such your sum assured would be reduced to reflect how many years you had been paying into the policy. Likewise with the terminal bonus, say you surrendered 22 full years into a 25 year term, you would get a terminal bonus based on a 22 year policy.

A better option than surrendering the policy would be to sell it. Endowment buyers will offer you more than the surrender value (upto 20% more depending on the contract) for a with profits policy. You won't however be able to find a buyer for unit-linked policies, there is simply no value in it for them as they fluctuate in value. Why would people want to but these policies? Well because they are actually good, low risk investments and the amount of future premium they will pay opposed to the potential returns make it worth their while. Well then, why do people want to sell? Because mainly they look at their target amount (and how much they were promised the policy would mature at by the person who sold the policy) and seeing the shortfall is excessive, they think they made a huge loss, whereas they actually have made a profit on how much they have paid in. Endowment buyers base their decisions purely on whether or not they are likely to make a profit from that point in time, not from 20 years ago.

Can I make a complaint about the policy?

Yes! Although you need to be aware of exactly what you have issues with first of all. There are two approaches and you can take up neither, one or both of them and in no way whatsoever should it impact on the value of your policy, or the speed in which it is paid to you.

* Complain about the selling of the policy * Complain about the under-performance of the policy

To complain about the selling of the policy

If you feel the policy was mis-sold then you have the right to claim against the original selling agent. Were you:

* Told an amount the policy would mature at * Told you would be able to afford a nice holiday and have money in the bank when it matures * Not told (or told the wrong thing) about the element of risk involved

If so, you should get in contact with your insurance provider and ask them to provide the name and address of the original selling agent along with their FSA reference number. You might think you know it already, however they might have been owned by a larger organisation so always check first. Once you have the FSA reference number, attempt to contact the seller of the policy and explain that you feel the policy was mis-sold. They are duty bound (and regulated) to get the matter resolved but if you are unhappy with what they present, you can then get in contact with the Financial Services Authority, quoting the FSA reference number and advising them that you would like to raise a mis-selling complaint. They will ask you if you have tried to contact the agent to get it resolved. If the FSA can't help you (maybe because of the date the policy was sold, or the agent has passed away) then all is not lost. Contact the FSCS (Financial Services Compensation Scheme) and try to raise a claim through them.

To complain about the performance of the policy

This one is a bit more tricky to approach, and a lot more tricky to win. If your policy is with-profits then the insurance company could (rightly) blame the previous surrenderers of policies as the reason for recent dramatic fall in value. They are of course right and can likely back it up with a load of literature that you was provided with explaining the process. They will also have copies of the "Red Letters" they have sent in the past advising of a potential shortfall and asking you to contact them or a financial advisor. This would usually be enough for them to dismiss a claim of underperformance. If they have not sent you any "red letters" in the past then ask them to provide details of any sent, and where they were sent to. As an example, if you had changed address without advising them, then you would be responsible for that, but if you had notified them and they hadn't acted upon it then you could rightly claim as your notification of a shortfall had been mis-delivered.

Your chances of a claim are slightly increased if you have a unit-linked policy as they are the ones investing the funds for you. They do have a get-out clause though in that you can swap and change the funds as you see fit, so how it is invested is down to you or your financial advisor. They might offer a small token of apology, but don't expect it to cover your shortfall.

No-matter what, if you feel aggrieved about the performance, then by all means, lodge a complaint with them, they are duty bound to give it due consideration in a speedy time (they should respond within 5 days of receiving your written complaint) and all complaints have to be logged with the FSA. Be constructive in your criticism.

Contact details:

Financial services authority - Tel 0300 500 5000 - http://www.fsa.gov.uk/

Financial services compensation scheme - Tel 0800 678 1100 - http://www.fscs.org.uk/

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David Worrall is an expert online marketer and marketing coach who teaches people from the ground, up, how to become an expert at making money online, including affiliate marketing and SEO. David also teaches how to use the best practises of blackhat marketing to enhance their whitehat earnings. He also has a degree in psychology and has a number of qualifications in financial advice - http://www.estimatedwealth.com

Life Insurance Advice Before Selling a Structured Policy

There are several classes of life insurance policies in Australia and before you decide to pass your settlement in for a lump sum payment you may find the following information essential to know.

Terminology in insurance is essential for clarity and if you are uncertain of the terminology used it could cost you many hundred's of dollars. If you don't clearly understand the wording either go back to the insurance company and ask them for clarification in writing or get professional legal advice.

The classes of insurance in Australia are whole of life, an endowment policy, a term policy an annuity policy or an Industrial policy. There are possibly less common ones available but these are the more usual insurance structures.

An Industrial policy is one where a small sum of money is paid regularly into a policy to insure either themselves or their infant children's lives. This type of policy matures after a predetermined fixed period or upon the death of the person insured should the death occur first.

These classes of insurance are the most common ones world wide and any differences that may come about are probably from your country's legislation governing the insurance industry or from your State legislation. Also some insurance companies have different terms and conditions from state to state even when you are in the same country.

Insurance policies are contracts and as such need thorough legal understanding as to what you can and can't do with your insurance policy. Not all insurance policies are allowed to be settled prior to their maturity date so before you spend the money be very sure that the settlement you are counting on receiving can be achieved. The best place to get this information is to go back to your insurance company that you are holding the policy with and get their guidelines and advice in writing.

About the Author

Do you know enough to get the best deal if you sell structured settlements to a Stockbroker or other financial institution? If not then read this at www.sell-structured-settlements.org now.