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McFall has wrong perception of endowments

In the recent news item about the Treasury select committee, John McFall huffs and puffs about endowment policies (Money Marketing, February 5). He seems to link the shortfall on endowment performance with sales commission paid. His ignorance of fundamentals is amazing.

However, he is a career politician, not an insurance and investment industry specialist, and should not therefore contribute to this debate.

My principal concern is that our industry does not sufficiently rebut some of the wrong perceptions held by the likes of John McFall. The FSA has very much contributed to a wrong understanding of endowment policy performance. Let me clarify.

•The sum assured on an endowment policy, which was used originally as a guide to the maturity value of the policy, was actually the amount guaranteed to be paid on the death of the policyholder or holders. This is a fundamental reason for taking the endowment policy in the first place.

•Company illustrations provided to policyholders indicated that there was a range of possible projected benefits based on PIA guidelines at the time. If performance was equivalent to the illustrated percentage growth (normally the middle one) the mortgage would be repaid in full. If growth was less, there would be underprovision. If it was more, there would be overprovision. That seems very clear. The policyholder made the appropriate decision based on that information. No misselling here.

•The projected deficit in the final maturity value against sum assured represents disappointment but not a financial loss to the policyholder.

•The premiums paid by the policyholder have purchased, first, the life insurance protection and, second, an investment. If the cost of the investment is greater than the maturity value of the policy, a definable loss has occurred. This is a totally different calculation from the calculation of disappointment when comparing the maturity value with the original sum assured.

• A mid-term assessment is no reason for accusations of misselling to be made.

It seems that the entire industry is dominated by the fear that the maturity value of the policy will not be as great as the sum assured but there is a failure to realise that this is not a financial loss to the client, it is merely a disappointment.

There have been sufficient warnings for policyholders to consider an alternative means of improving their situation, bearing in mind the fact that interest rates and fund performances are significantly lower now than anticipated some years ago but then the interest they are paying on their mortgage is also lower and enables them to react accordingly. They have also got life insurance.

A financial loss has occurred when the maturity value of the policy is less than the premiums paid, after taking into account the cost of the life insurance. For with-profits endowment policies, I believe that so far that has never occurred and I would hope that it never will.

So what is all the fuss about? Why doesn&#39t the industry put right these wrong perceptions by drawing attention to the return on investment rather than the potential disappointment against a forecast?

Malcolm Baxter Baxter & Lindley Financial Services, Tring, Hertfordshire


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