Borrowers warm to terms of endowment: Policyholders may be entitled to low-cost loans for small amounts

ONE OF the cheapest ways to borrow small amounts of money is to raise a loan against an endowment policy. A number of companies offering these deals are now cutting interest rates.

The loans are not common with endowments taken out to back mortgages, but they are offered against savings policies. They are widely available to holders of with-profit policies but difficult to come by on unit-linked contracts because the surrender values, and thus the insurer's security, can fluctuate wildly.

Equitable Life is cutting its endowment loan rate from 11 per cent to 9 per cent. The insurer was prodded by an Independent reader, Walter Coughlin, who has a pounds 6,000 loan secured against a series of Equitable policies.

Mr Coughlin has not enjoyed a similar response from Refuge Assurance, where his wife has a loan for about pounds 5,000. They have asked for a rate cut but the charge remains at 13 per cent.

John Cudworth, chief executive of Refuge, said it was expensive for the company to provide small loans. 'We don't enjoy lending money in small amounts,' he said. 'This is a service to policyholders. If they choose not to like the service, they are welcome to go elsewhere.'

Mr Cudworth did not rule out a rate cut. 'Things change in this market so fast that anything can happen,' he said.

Scottish Amicable, which lends against with-profit policies, dropped its endowment loan rate from 11 per cent to 9 per cent on Tuesday. 'We tend to be reasonably related to base rate,' said Bill Robertson, product marketing manager. 'Once it became clear interest rates were going to stay down, we moved the rate.'

Many investors in endowment policies will not realise that they can borrow from the insurance company, with the loan secured on the value of the policy. Prudential Corporation has 36,000 policy loans on its books, but more than 2 million policies are eligible.

The usual arrangement with these loans is that the borrower pays interest annually but does not repay capital on a regular basis. They can pay off the loan in lump sums or have the whole lot deducted from the proceeds of the policy when it matures.

Insurers usually lend a maximum of 80 or 90 per cent of the policy's surrender value. Since this value will not be high in the early years, many policyholders will only be able to borrow small sums.

But with banks and building societies still charging 20 per cent or more on unsecured personal loans, the endowment option may still be attractive. Policyholders will usually do better by raising a loan than surrendering their investments.

Companies do not make huge efforts to promote the loans. Richard Anscombe, financial planning manager at the Prudential, said borrowing becomes a a possibility when it is asked to give quotations for surrender values on a policy.

But the Prudential does not advertise the lending facility. 'We are supposed to promote the policies as long-term investments, not short-term ones,' said Mr Anscombe.

The Prudential will lend sums of pounds 250 upwards, for a minimum of six months, against with-profit endowment policies and whole-of-life policies.

'The maximum we lend on an endowment policy is 90 per cent of the surrender value, and on a whole-of-life policy, 80 per cent of the surrender value,' explained Mr Anscombe.

He said the Prudential had charged 13 per cent on its loans since 1984. The rate is linked to the yields it would be obtaining on medium-dated gilts if it was investing the money.

Medium-dated gilt yields have come down to around 9 per cent and the Prudential is now considering cutting its rate to the same figure.

Some policyholders may find that their banks are willing to lend against the security of endowment policies. Royal Bank of Scotland said: 'This is not something we do often. I don't think we even have a leaflet on it. But it can be a useful facility in certain circumstances. The rate would be agreed between the customer and the manager.'

Barclays said it would consider endowments as security for loans, but usually it cost the bank pounds 60 to register a legal charge, so the costs of setting up the loan would be high.

All the insurers we spoke to said there would be no set-up charges on their loans.

(Photograph omitted)

Start your day with The Independent, sign up for daily news emails
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Experienced Recruitment Consultant

£20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

Day In a Page

Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Who is Oliver Bonas and how has he captured middle-class hearts?

Who is Oliver Bonas?

It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

60 years of Scalextric

Model cars are now stuffed with as much tech as real ones
Theme parks continue to draw in thrill-seekers despite the risks - so why are we so addicted?

Why are we addicted to theme parks?

Now that Banksy has unveiled his own dystopian version, Christopher Beanland considers the ups and downs of our endless quest for amusement
Tourism in Iran: The country will soon be opening up again after years of isolation

Iran is opening up again to tourists

After years of isolation, Iran is reopening its embassies abroad. Soon, there'll be the chance for the adventurous to holiday there
10 best PS4 games

10 best PS4 games

Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
Transfer window: Ten things we learnt

Ten things we learnt from the transfer window

Record-breaking spending shows FFP restraint no longer applies
Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

‘Can we really just turn away?’

Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

Nine of Syria and Iraq's 10 world heritage sites are in danger...

... and not just because of Isis vandalism
Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

Girl on a Plane

An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
Why Frederick Forsyth's spying days could spell disaster for today's journalists

Why Frederick Forsyth's spying days could spell disaster for today's journalists

The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent