Endowment bonuses

Some insurers are announcing annual bonuses of 5%. This is below the 6% necessary if most endowments sold recently are to hit their target. For policies sold in the late 1980's and early 1990's it was common to set premiums on the basis of annual bonuses of 8.5%.

Those shortfall letters

The Financial Services Authority (FSA) has told life assurance companies to send projections by 30 June 2001 to all endowment mortgage customers showing whether their endowments are likely to repay mortgage loans.

By 31 August 2000, over 4.6 million letters had been sent, out of an estimated 11 million to be sent to 6 million households. Several million may project shortfalls.

The letters mimic traffic lights.

• A green letter means a 6% annual investment return will be enough to avoid a shortfall on your mortgage debt.
   
• An amber letter means you need growth of 6% to 8% and the FSA "considers it possible your plan may not pay out enough".
   
• A red letter means you need annual growth above 8% to avoid a shortfall and the FSA "strongly suggests you consider taking action".

How bad are they?

A survey by Money Marketing magazine in June 2001 showed NPI sending 99% green letters, Standard Life 98%, NFU Mutual 94%, CIS 92%, and Britannic 81%.

A high proportion of red letters have been sent by Scottish Legal Life (53%), Lloyds TSB Life (50%), Scottish Friendly (38%), MGM (26%), NatWest Life (25%), Scottish Provident (18%) and Royal & Sun Alliance (16%).

Some insurers refused to disclose percentages, including Abbey Life, Allied Dunbar, Barclays Life, Century Life, Colonial (now part of Winterthur Life), Cornhill Insurance, Eagle Star, Family Assurance, Generali, Guardian Financial Services (now part of Scottish Equitable), Halifax Life, Hearts of Oak, Ideal Insurance Group (!), JP Morgan Fleming Asset Management (Save & Prosper), Legal & General, Lincoln, London & Manchester (Now in Friends Provident), M&G, Old Mutual, Royal London (which now includes United Friendly), Schroder Pensions, Scottish Widows, Swiss Life (Pioneer Mutual), Sun Life Financial of Canada, Teachers, Tesco Personal Finance, Windsor Life and Woolwich.
Boo. Draw your own conclusions.

What next?

OK, so far so bad - what do the endowment shortfall letters mean and what action should be taken?