Monday, 31 May 2010

Endowment policies - Keep the profits - dump the cost

The sorry tales describing the failure of UK Endowment policies to deliver on their promises are well documented. What is not so widely recorded is how the insurance and endowment providers managed to keep the profits and dump the risks on the policy holders.

The promise of an endowment policy was to pay off a house debt at a predicted time in the future by means of regular payments invested over time with (the same) insurance company. In addition to that there was a life insurance component that would pay back the debt in the event of an early demise.

The insurance company get from the deal, regular premium payments split between commission, life insurance premiums and cash to invest. The policy holder gets life cover ( that only really benefits the mortgage debt owner ) and a share in possible future profits of a fund he does not control and cannot influence.

When things started to go wrong in the 90's and 00's and the returns from the investments did not match the generous projections upon which the policies were sold, the insurance companies dumped the risk on the customers and just gave up on the moral obligation of meeting the target returns for the policies. The colour coded letters being your guide to their abject failure. What they did not do was reduce the management charges on the investment funds, reduce or remove the cost of the life insurance premiums ( many people would have alternative cover available) or anything that actually alleviated the shortfall costs to the policy holder.

At the time the provision of cheaper monthly payments just drove up house inflation giving no more purchasing leverage as everyone else had the same deal. Basically the payments were cheaper because the debt was not being paid back. The actual overhead costs of the policies life premium, selling commissions, and investment "management" charges are obscure or not disclosed leaving the policy holders with no option to challenge the life companies to tighten-up as they will have to do to meet the repayment due.

They promised to pay for your house, you will be lucky to get the price of a second hand car out of most endowment policies. Given that may folks will still have the entire original house debt, will have paid the full interest on that debt for 25 years and will have put in premiums to the endowment policy on top, this all adds up to the Great British housing finance rip off.


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