Norwich signals end to cuts in policy payouts

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The Independent Online

Norwich Union yesterday became one of the first life insurers to signal an end to cuts in maturity payouts for tens of thousands of with-profits policyholders, as it announced that it would keep all its bonus rates at the same level as last year.

The insurer claimed that the level of present maturity payouts now being made ensured that anyone with a mortgage-linked policy would easily receive enough to pay off their loan.

But Norwich also warned that new home buyers today would do better to pay off their mortgage quickly rather than taking out an endowment. The insurer's warning came as two other life companies, Commercial Union and Scottish Life, announced that payouts to 25-year policyholders would rise slightly compared with last year. But their 10 and 15-year policies faced continuing reductions.

Gordon Harpin, a director at Commercial Union Life, said: "I tend to agree that the cuts we have seen in previous years will not be as great in the future. But I would be loath to say that they will not happen at all. Even after making the cuts that we have on 10-year policies, we are still paying out more than Norwich Union."

Norwich's bonus announcement means that an investor with a 25-year endowment maturing now receives a tax-free annual return of 12.5 per cent a year for a pounds 50 monthly investment. Someone with a 10-year maturing endowment would get pounds 10,265, equal to a annual yield of 10.4 per cent.

By contrast Commercial Union would deliver a 13.6 per cent annual yield on its 25-per cent endowment and Scottish Life would pay 13 per cent. For 10-year policies, CU investors will receive pounds 10,292, down from pounds 10,849 last year.

The announcements mark the beginning of the bonus season, when insurers announce the amount they will pay policyholders whose endowments mature. With-profits policies are designed to smooth out investment returns so that a bad year is offset by part of the amount retained from a better one.

Since the early 1990s, payouts have fallen by as much as 60 per cent on 10-year policies as the more recent low-interest and low-inflation climate delivered lower returns on equity markets.

Richard Harvey, finance director at Norwich Union, said yesterday: "Low inflation will mean lower investment returns in the 1990s when compared with the soaring figures of the Eighties. But investors will still enjoy good real returns from our investment portfolio."

Comment, page 17

Norwich Union

10-year endowment

% annual yield

1986 14.8

1987 16.2

1988 15.9

1989 15.9

1990 16.4

1991 15.8

1992 14.4

1993 13.0

1994 12.1

1995 10.3

1996 10.4

Based on Male aged 30, paying pounds 50 monthly

Total payout at 1 Jan 96 pounds 10,265

Average inflation 1986-96


Source: Norwich Union