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Stay the course with common sense

I am not currently involved in the mortgage market. How^_ever, I have many

clients with existing endowment policies who are concerned about the

adverse publicity regarding the prospects for their plans.

It would be naive to expect a balanced view in the media although,

surprisingly, there have been on or two positive comments in certain

news^_papers over recent weeks.

The most popular current description of financial advisers seems to be

“commission-greedy” and the Consu^_mers&#39 Association, which is hardly

likely to give an informed option on any financial issue, puts us in the

same league as mass murderers.

There is no doubt some policies will have been sold on the cheapest

premium basis or by companies with a poor track record. However, the

majority will be with reputable companies.

The FSA, in its wisdom, has decided that future growth rates on endowments

will be 6 per cent per annum because inflation and interest rates will be

lower from now on. As everyone knows, surrender values are lower than the

true value of policies, as is proved by a huge market of sophisticated

investors who are willing to pay up to 30 per cent more than the surrender

value to buy the plans from those who are being panicked into selling them.

I am sure those buying secondhand endowments expect a higher return than 6

per cent per annum in the future, especially after having paid

substantially more than the surrender value to acquire them.

As the surrender value is being used as a starting point for the

calculation, to then assume future growth at 6 per cent per annum, is it

any wonder that there are projected shortfalls at maturity?

I recently visited a female client who has a Legal & General low-cost

endowment maturing in 2014, sum assured 16,480 and a premium of 20.71

month. She was 25 years old when she took the policy out. A 25-year

endowment maturing in 1999 at 20 per month paid out 42,063 based on a male

30 next birthday – source: Money Marketing survey: June 1999.

Future maturity values have a long way to fall to produce a shortfall,

yet, incredibly, using the FSA&#39s criteria, Legal & General is asking her to

increase her premiums.

Meanwhile, the FSA is criticising the industry for using the situation,

which it created, as a sales opportunity. If this were not happening you

would not believe it.

Traditional insurance policies are inflexible with poor surrender values.

However, they are meant to run their course, which, in my experience, is

will understood by the public, and the ultimate returns from them reflect

this. This structure is providing an unrealistic view of their current

value, creating a distorted calculation of their worth.

So who is providing the support for IFAs at the moment? The silence from

the insurance companies is deafening but who can blame them when they can

increase their premium income so easily?

I am sure that the FSA did not intend to worry the average member of the

public but unfortunately this is exactly what it has achieved. What is the

solution?

A client approached me recently and decided that, rather than increase his

endowment premium, he would invest in a regular savings Isa on the basis

that if his endowment paid his mortgage off, then the worst that would

happen is he would accumulate some additional savings.

He came to this conclusion with no help from me. I just happen to agree

with it.

Unfortunately, such common sense is unlikely to prevail on this issue, nor

I suspect on whatever is the next area of attack.

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