Poor deals on the home loans front
In part two of our investigation into life assurance, Peter Rodgers and Nic Cicutti look at mortgages
Saturday 19 October 1996
Yet a large proportion of policies are surrendered long before they mature and the reality is that the value at an earlier stage matters just as much as the payout at maturity. Maybe 30 per cent, and perhaps even fewer, are held for the full term of the policy.
The rankings of mortgage repayment policies in the tables, devised by John Chapman, a former senior official of the Office of Fair Trading, demonstrate that investors often receive a poor deal for early surrender.
Moreover, some of the best known brand names, such as the Prudential, which this week announced a big increase in sales of its investment products as a result of its "Prudence" marketing campaign, are consistently near the bottom of the performance tables.
The tables show that at the end of year three, only two companies will pay back all the cash invested, and even after 10 years only 20 out of the 32 repay the full pounds 12,000 that has gone into the policies.
Admittedly there is some life insurance cover involved in all policies, but this may account for 4 to 5 per cent of the premiums paid, and cannot explain the meagre returns from many companies.
The importance of shopping around between insurance companies is demonstrated by dramatic differences in the amounts paid out when mortgage policies are surrendered early. This is a reflection of widely varying charges and surrender penalties.
The bottom performer in the table, Royal Insurance, would pay back only 62 per cent of the money invested after 10 years, less than half the pounds 15,700 from Equitable Life, the top performer.
The difference between top and bottom is even bigger if a mortgage policy is surrendered after three years. Royal pays pounds 1,160, less than a third of the pounds 3,610 from Equitable Life's with-profits endowment.
The lowest surrender value of all after three years is Allied Dunbar's 25-year unit-linked policy, which pays back a meagre pounds 715 after investors have put in pounds 3,600. (Cash values are omitted from the unit-linked mortgage table.)
Within the tables, it is clear that some companies, such as Sun Life of Canada combine the pitfalls of low surrender values with the enticement of reasonably good final maturity values.
This is not surprising, since insurance company marketing departments need to be able to show a good final payout at the end of the mortgage period to new customers.
However, the high payout at the end is often at the expense of those who lapse early, who have paid high charges and suffered heavy surrender penalties.
In extreme cases, insurers come to rely on a large proportion of early surrenders on mortgages and pensions for their profitability, and this is why attempts to make them publish comprehensive tables showing the proportion of early surrenders have been fiercely resisted in the insurance industry.
A company can in fact choose to take its profits early in the life of the policy, by imposing high surrender charges at that stage. In these circumstances, the larger the number of customers who surrender early, the higher the company's profit is likely to be.
Furthermore, early surrender penalties do not affect calculations of the return to maturity on a mortgage policy. The good rewards for the few who remain to the end, trumpeted by salesmen, may be cross-subsidised by penalties on those who quit early.
This makes it doubly important to look at all three surrender values when rating a company's overall performance and to pick those that offer good results after three and 10 years, as well as decent payouts at maturity. A good rule is to look very suspiciously at those that pay back little in the early years. Are they really working in the interests of their customers?
As the mortgage rankings show, for some big names such as the Pru, the payout is poor at every stage. It may be that high costs in running the business make it hard for the Pru to compete in its projections with the most efficient companies.
A few years ago, insurance companies' marketing strategies relied on claims that by taking out an endowment or unit linked policy instead of a repayment mortgage, the debt would be repaid at the end and there would probably be a lump sum left over from the policy.
Sometimes, those claims have proved hopelessly optimistic, because the returns on policies have fallen short of expectations, so much less is made nowadays of the prospects of a lump sum left over at the end. Insurers now try to keep monthly payments to the minimum necessary to hit the target of paying off the mortgage.
One result of aiming low is that many homeowners - such as those investing through the Lloyds Bank subsidiary Black Horse Financial Services - are being asked after a few years to top up the monthly contributions to their policies, simply to ensure they are not left with an unexpected debt at the end.
But the truth is that the risk of a shortfall at maturity is actually a minority problem, because such a large proportion of policyholders surrender early. These are the commonest victims of the insurance industry's charging policies, which is why Mr Chapman's rankings are so important for sorting out the good from the bad.
25-year mortgage repayment plan - with-profits
Company value at value at Maturity Projection Past
end of yr3 end of yr10 value ratings performance
Equitable Life 3,610 15,700 75,300 A+A+A+ A+A+C
Standard Life 3,494 14,769 64,837 A+AB AAB
Clerical Medical 2,990 13,600 66,700 AAB BBA
NFU Mutual 3,600 12,200 66,600 A+BB A+CB
Friends Provident 2,390 11,900 69,900 BBA BBA
Scottish Provident 1,970 13,000 68,077 BBA BAB
Legal & General 1,926 13,092 67,657 BAB CAA
Scottish Widows 3,417 14,438 66,164 A+AB BBB
Sun Alliance 2,760 13,800 66,000 AAB CAC
Scottish Amicable 1,956 13,707 69,160 BAA CCC
Commercial Union 3,079 12,794 63,900 ABC CBA
Scottish Mutual 2,460 13,600 61,913 BAC CBB
Eagle Star 2,390 13,500 63,100 BAC BC-B
Wesleyan Assurance 2,372 12,451 65,726 BBB BAA
Norwich Union 2,274 13,454 63,530 BAC BBC
General Accident 2,206 11,568 66,517 BBB BAA
Scottish Equitable 2,050 13,400 63,100 BAC XXX
CIS 2,190 11,200 68,900 BCA ABB
Sun Life 1,950 12,500 67,000 BBB CCC-
AXA Equity & Law 1,400 12,100 70,200 CBA XBA
Medical Sickness 2,490 10,600 67,546 BCB BBC
Royal London 2,142 9,411 65,022 BC-B BBA
RNPFN 1,694 9,775 71,994 CCA+ BAA+
Britannia Life 1,800 12,600 64,400 CBC XBC
Guardian Financial 1,760 12,800 62,400 CBC XXX
Britannic Assurance 1,828 9,539 66,300 CCB BCC
Colonial 1,688 12,382 62,078 CBC CCC-
Tunbridge Wells 1,647 11,186 67,373 CCB CAA
Prudential 1,760 10,900 61,900 CCC CBB
Scottish Life 1,678 10,550 61,836 CCC CBB
Sun Life Of Canada 1,130 8,970 67,900 C-C-A BBB
Royal Insurance 1,160 7,490 61,600 C-C-C XCA+
Average 2,227 12,156 66,082
Projections based on investment of pounds 100 a month,starting at age 30
X=data not supplied
Investment funds are assumed to grow at 7.50% a year
25-year mortgage repayment plans - unit-linked
Abbey National Life
Legal & General
Gan Life and Pensions
AXA Equity and Law
30 June 2015 05:56 PM
UK consumer groups complained that British holidaymakers face another two years of mobile phone misery before the law comes into effect
26 June 2015 10:30 PM
The P2P industry must do more to shake off an unjustified image of being too complex and risky for the everyday saver, says Andrew Hagger
26 June 2015 10:30 PM
Six of the energy company's customer have cause to blow a fuse this week
26 June 2015 10:30 PM
Derek's portfolio is currently suffering because of his failure to be more ruthless
25 June 2015 08:01 AM
One debtor was given a repayment plan that would have taken 125 years to repay
Challengers are smashing the traditional high street banks when it comes to offering decent savings rates
23 June 2015 11:46 AM
Ignore the new breed of savings institutions and you'll lose interest
NatWest pledged five years ago it wouldn't close the last bank in town. Now villagers have been told the branch shuts in September
23 June 2015 05:02 PM
When the last bank closes, local shops quickly go out of business
19 June 2015 10:00 PM
19 June 2015 10:00 PM
Questions of Cash: The paperwork wasn't right so I was left high and dry with a broken washing machine
19 June 2015 11:00 PM
A reader encountered a problem with a Currys washer/dryer care plan
19 June 2015 10:30 PM
Interest rates have never been cheaper if you want a five-figure personal loan but for lower-value loans it's a very different picture
18 June 2015 12:56 PM
Thousands still waiting for payments to go through
17 June 2015 12:01 AM
There are many people in dangerous debt who don’t seek advice
17 June 2015 12:20 PM
Some 600,0000 payments have been delayed many of which could be crucial
16 June 2015 11:30 AM
An army of tricksters are using online websites to trap their victims
- 1 Tunisia hotel attack: Locals form 'human shield' to protect hotel from gunman Seifeddine Rezgui
- 2 Greece crisis: Alexis Tsipras accepts troika bailout proposals with conditions
- 3 German ethics council calls for incest between siblings to be legalised by Government
- 4 French woman dies in freak bungee jumping accident
- 5 Facebook rainbow profile pictures likely being tracked by social network
The moment a Queen's Guard soldier lost it and drew his gun at annoying tourist
Greece crisis: IMF was pushed around by Angela Merkel and Nicholas Sarkozy – and now it is being humiliated
Greece crisis: The wider lesson is that it’s time to abandon this failed experiment in currencies
'I wish the BBC would stop calling it Islamic State' – David Cameron unleashes frustration at broadcaster
Pentagon accuses Russia of 'playing with fire' over nuclear threats towards Nato
They are neither a 'state' nor 'Islamic': Why we shouldn't call them Isis, Isil or IS
iJobs Money & Business
£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...
£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....
£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...
£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...
Day In a Page
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.
Well-located for coastal walks and popular restaurants, this detached four-bedroom home offers views over farmland, to the Solent, the Purbecks and Bournemouth.
If you love high ceilings, school conversions like this one are bang on the money. This two-bedroom flat is minutes from Burgess Park and the foodie haven at Borough Market.
Set within a church conversion in Bermondsey, this two-bedroom maisonette combines existing features, such as original arches and brickwork, with a contemporary finish.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.