Bonus cuts hit home owners

THE COST of paying off a mortgage loan through with- profits insurance policies has risen by more than 12 per cent in the past five years.

Fears that returns on with- profit endowments might not be enough to pay off the cost of a loan follow several years of bonus rate cuts by most life companies. And further cuts are expected early in the New Year when a number of insurers, including Norwich Union, Standard Life and Scottish Amicable, announce their bonuses.

Insurance firms claim home buyers who took out endowments at the height of the housing boom in 1988 should not have to increase payment levels to make up the difference.

They say that policyholders who bought homes then will pay less because the life companies have calculated their future investment returns on a more conservative basis.

With-profits policies aim to smooth over both rough and good investment patches and give more level returns by paying annual bonuses and a final amount at maturity.

Life insurance companies paid out higher final bonuses than was justified by investment returns in the 1980s. Cuts followed as returns fell.

The specialist financial magazine Money Management estimated in May this year that payouts on 25-year policies had dropped by an average of 1.7 per cent over 12 months. The higher the bonus rate or growth assumption, the smaller the premium paid.

Scottish Amicable manager Bill Robertson says his company assumes an annual growth rate of 7.5 per cent. This is mid- way between the 5 and 10 per cent projected rates that his office is allowed by Lautro, the industry's regulatory body, to use with clients.

Five years ago, the mid- point projection would have been 8.75 per cent. On that basis, premiums for a couple aged 29 would have been pounds 63.40 a month for a pounds 50,000 mortgage, compared with pounds 74.20 under current assumptions - a rise of 17 per cent.

Legal & General, which uses a different calculation, would charge the same couple pounds 72.50 - a 10.7 per cent rise from the pounds 65.50 a month charged five years ago.