Eagle Star forced to top up endowment mortgages

Eagle Star, the life assurer, is promising to compensate thousands of customers whose endowment policies are likely to fall short of paying off their mortgages.

Andrew Verity examines what may be a widescale problem for the industry.

Eagle Star is to top up unit-linked endowment mortgages for thousands of its customers because its charges have been much higher than policyholders were led to believe.

The company believes that other life offices will have to follow suit. A spokesman said: "The vast majority of the life offices are in a similar position. Expenses were higher than policyholders were shown when they bought the policies."

In a move which is likely to cost the company millions of pounds, Eagle Star has written to customers admitting that high charges mean many customers will have less than they need when their endowment matures.

The company is using its own funds to boost the amount going in to unit- linked endowment policies, savings policies linked to stock market assets which are designed to pay off a mortgage when they come to maturity.

Whereas Eagle Star usually invests pounds 100 for every pounds 100 of contribution, it will invest up to pounds 170 to correct the problem. The rescue operation is thought to be designed to pre-empt more drastic action later should industry regulators intervene.

Tens of thousands of homeowners who took out unit-linked endowment policies in the late 1980s and early 1990s with other life companies could also face shortfalls in the amount needed to pay off their mortgages.

The problem stems from controversial ways of showing how much the life office would take out of policyholders' savings in expenses and by how much their savings would grow.

Lautro, which regulated the industry until 1994, dictated that all providers had to show potential buyers a standard set of charges to take a policy. These were much lower than almost all life offices charged.

Life offices also tended to assume optimistic returns from investments. Premiums depended on how much investments grew. Higher returns suggest lower premiums, giving the life office a competitive advantage.

Nigel Webb, marketing director at Equitable Life, said: "The danger is with these products that people want to pay the lowest premium. But it could have a lower premium because in fact it is making a more optimistic assumption about investment growth."

Life assurers Legal & General and Guardian Financial Services, said yesterday they were reviewing their endowment policies. Legal & General admits a "small minority" of policyholders may need to be told of a mortgage shortfall.

Endowment providers sold more than 500,000 unit-linked endowments every year until 1993.

Eagle Star claims that when the policies were sold, all but one office, Equitable Life, had expenses which were higher than the standard rates they were forced to use by Lautro.

Some companies used their own charges to work out how much in premiums a company would have to pay. But others, such as Scottish Widows and Standard Life, felt pressured into offering lower premiums than other offices.

Start your day with The Independent, sign up for daily news emails
Life and Style
tech
Arts and Entertainment
Rocky road: Dwayne Johnson and Carla Gugino play an estranged husband and wife in 'San Andreas'
filmReview: In the face of all-round devastation, even Dwayne 'The Rock' Johnson appears a little puny
News
i100
Arts and Entertainment
Bright lights, big city: Melrose Avenue in Los Angeles by dusk
books
Sport
Harry Kane makes Paul Scholes' Premier League team of the season
footballPaul Scholes on the best players, managers and goals of the season - and the biggest disappointments
News
i100
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Guru Careers: Pricing Analyst

£30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

Guru Careers: C# Project Team Lead

£55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

Day In a Page

Fifa corruption: The 161-page dossier that exposes the organisation's dark heart

The 161-page dossier that exposes Fifa's dark heart

How did a group of corrupt officials turn football’s governing body into what was, in essence, a criminal enterprise? Chris Green and David Connett reveal all
Mediterranean migrant crisis: 'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves,' says Tripoli PM

Exclusive interview with Tripoli PM Khalifa al-Ghweil

'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves'
Raymond Chandler's Los Angeles: How the author foretold the Californian water crisis

Raymond Chandler's Los Angeles

How the author foretold the Californian water crisis
Chinese artist who posted funny image of President Xi Jinping facing five years in prison as authorities crackdown on dissent in the arts

Art attack

Chinese artist who posted funny image of President Xi Jinping facing five years in prison
Marc Jacobs is putting Cher in the limelight as the face of his latest campaign

Cher is the new face of Marc Jacobs

Alexander Fury explains why designers are turning to august stars to front their lines
Parents of six-year-old who beat leukaemia plan to climb Ben Nevis for cancer charity

'I'm climbing Ben Nevis for my daughter'

Karen Attwood's young daughter Yasmin beat cancer. Now her family is about to take on a new challenge - scaling Ben Nevis to help other children
10 best wedding gift ideas

It's that time of year again... 10 best wedding gift ideas

Forget that fancy toaster, we've gone off-list to find memorable gifts that will last a lifetime
Paul Scholes column: With the Premier League over for another year, here are my end of season awards

Paul Scholes column

With the Premier League over for another year, here are my end of season awards
Heysel disaster 30th anniversary: Liverpool have seen too much tragedy to forget fateful day in Belgium

Liverpool have seen too much tragedy to forget Heysel

Thirty years ago, 39 fans waiting to watch a European Cup final died as a result of a fatal cocktail of circumstances. Ian Herbert looks at how a club dealt with this tragedy
Amir Khan vs Chris Algieri: Khan’s audition for Floyd Mayweather may turn into a no-win situation, says Frank Warren

Khan’s audition for Mayweather may turn into a no-win situation

The Bolton fighter could be damned if he dazzles and damned if he doesn’t against Algieri, the man last seen being decked six times by Pacquiao, says Frank Warren
Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

Blundering Blair quits as Middle East peace envoy – only Israel will miss him

For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
Fifa corruption arrests: All hail the Feds for riding to football's rescue

Fifa corruption arrests

All hail the Feds for riding to football's rescue, says Ian Herbert
Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

The Kurdish enclave still resisting the tyranny of Assad and Isis

In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

How I survived Cambodia's Killing Fields

Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

How Stephen Mangan got his range

Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor