The Mortgage Clinic: 'Should we cash in our endowment policy?'
Wednesday 23 July 2008
'We took out a 25-year interest-only mortgage in 1987, along with a Standard Life endowment, but we no longer need the endowment to pay off the mortgage nor the life insurance aspect of the endowment policy. Should we carry on paying £42 a month for this policy until it matures in 2012, or should we cash it in now?' Sally Jenkins, Sutton Coldfield
Endowment has been a dirty word since the mis-selling scandal that began when commission-hungry salesmen promised home loan "windfalls" that never materialised. So it's a great relief to hear that you've escaped a mortgage shortfall via these notorious policies, which invested in the stock markets in a bid to pay off a home loan, and can now choose how to dispose of such a discredited product.
But while it might feel like a triumph to cash it in immediately, there's a case for keeping it as a savings policy until maturity. "As you bought the endowment policy in 1987, it's likely to be a 'with-profits' policy – these pick up annual bonuses and may also give a 'terminal' bonus, too," says Ray Boulger of broker John Charcol.
According to Andrew Montlake, of Cobalt Capital, with-profits policies, although contentious, can "grow much faster over the end stages, dependent on underlying investment trends".
So, over the next four years, you could pick up a thousands of pounds in line with the Standard Life endowment fund's performance – depending on the size of your policy, of course.
David Hollingworth, of London & Country, says the problem is that "it's impossible to know how the policy will do" and with the state of the stock market today, it's a gamble that only you can decide to take.
Melanie Bien, of Savills Private Finance, points out that "equities are in a bear market and it looks as though this could be the case for at least a couple of years".
You should receive a projection letter about the fund's performance every two years but to check on it now, write to or call Standard Life and request an update. The alternative is to cash it in now, and save yourself the £42 a month. But don't just surrender the policy to Standard Life, says Hollingworth: "It's worth exploring the second-hand policy market where a with-profits policy can be sold, often for more than the cashing in value."
You could try a company such as AAP ( www.aap.co.uk), which claims to offer up to 35 per cent more than life companies on some policies. Although you say you no longer need the life insurance (sold with all such endowments), make sure you've got enough to cover you and or your family; if you haven't, it could be a lot more expensive than 21 years ago.
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