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Is There a gap in your endowment mortgage?

It is never nice when you receive less than you expected to get. If you have spent decades paying into a scheme, it is not unreasonable to expect that the insurance company will at least give you their minimum expected return on your many payments over the years. And if, at the end of your term, you don’t receive at least the forecast minimum return, let alone the strongly advertised potential big gains, you want to know why that is.

What is an Endowment Policy?
An endowment policy is a scheme that millions of us have taken out over the last 40 years. During the 1980’s and 1990’s, it was very common for people to take out this policy alongside an interest-only mortgage. In theory, after paying into the policy for a matter of years, it will pay off. The sum of money was aimed at allowing people to pay off the outstanding amount of their mortgage, with hopefully a healthy surplus. When you pay for the policy, you receive bonuses and interest. Over time, the sum accumulates, and you should end up with a significant amount at the end of the policy.

These days, few people use this type of scheme to help them with their finances. In fact, over the last fifteen or so years, this type of policy has become less and less popular. While, much of the time, people use the policy to pay for their mortgage, they were also taken out as long-term saving plans. When you take out the policy, an adviser will make you aware of the term. At the end of that term, the policy will pay out. In most cases, it will also pay if you die before you complete the term.

Why might there be a shortfall?
Usually, there is a life insurance aspect of the policy. That is to say that if you die before the end of the term, the policy will pay out in full so that your loved ones can cover the cost of your mortgage. If you have a dual policy, this should happen when either you or your partner die. In an instance like this one, you should get the full amount.

When you get to the end of your policy and are looking to repay your mortgage and find that there’s a shortfall, it can be catastrophic. If you need that money to see you through your golden years, you might not know what to do. You should remember that this policy is a type of investment. Unfortunately, investments don’t always pay off.

There are a great many reasons why you could receive less money than you thought you would, the most common of which tend to be over-optimistic projected investment returns by the insurance companies coupled with high charges.

Double check your agreement
The first thing you ought to do is double check your agreement. Dig out your paperwork and see what the small print says. If the policy guarantees you a particular amount, you have every right to demand it from the company. You should know that you incur extra fees, such as the Market Value Reduction when you cash in your policy before the term ends. That means that you may get much less money than you thought you would. This applies to any form of credit instrument you might consider using. In fact, just recently the FCA started to promote a more transparent and easy to understand this type of investment.

Start paying off your mortgage capital
So, what can you do to supplement the shortfall? Well, if you were going to use the money to pay off your mortgage, you need to find a way to top up the fund. If you don’t have the right amount to cover your outstanding debt, it can be difficult to know where to start. The first thing you can do is start paying off some of the mortgage amount with the money you receive. This will at least reduce your interest rate, which means that you will pay less each month.

Convert your mortgage
Next, you might want to see whether you can convert your current mortgage plan. It is likely that you are on an interest-only plan at the moment. That means you are paying a sum of money on a monthly basis. Those payments do not clear any of your debt, though, which could be a serious problem. If you can convert your mortgage to a repayment deal, you can start to wipe out some of the debt. If you can’t afford a full repayment deal, you can opt for a partial one.

Extend the term of your mortgage
This option is not a popular one, but it might be your only choice. You might want to extend the term of your current mortgage agreement. Regrettably, that means borrowing more money, in the long run. Mortgages are a form of loans, which means that you will owe a lender. If you plan to work for at least another ten years, you may be able to cover the costs of this scheme. You need to be careful, though, as you could get yourself into more debt by taking a deal like this one.

Invest in stocks and shares
If you use the sum of money wisely, you might find that you can increase it over time. If you are already aware that your endowment will incur a shortfall, you might want to cash it in early. You can use the amount to invest in stocks and shares. If you know a thing or two about the stock market, you might want to consider this option. Of course, before you do anything, you should talk to a financial adviser about your options. If you need the money to pay off your mortgage, the last thing you want to do is to make a poor investment.

Use your pension
Most pension schemes offer up to 25% of the pension pot as a tax-free lump sum. Whilst this is not the ideal choice, as it will affect your income in retirement, if the maturity of your endowment policy coincides with retirement and you don’t wish to downsize, it’s an option worth considering.

Consider downsizing your home
If, after you have checked out all the options, you have no way of paying off your mortgage, you need to think about other options. You could consider downsizing your home. If the sum of money you received won’t cover your current mortgage, would it cover a slightly smaller one? Moving to a cheaper property could be the solution you need. Of course, this option is a whole lot of hassle, but it might just be worthwhile.

An Accountant’s View

David Jones Shrewsbury Accountant and Founder of Morgan Jones

David Jones Tax Accountant

I myself, am guilty of arranging many endowment policies in the late 80’s and early 90’s in the days before the FCA came into existence and when accountants were able to arrange policies for their clients. At the time I was bombarded with literature and financial information, showing how well this or that insurance company had done in the past. All of this data, whilst not legally binding on the companies, was heavily marketed with the clear implied promise that not only would the projected proceeds be met, but almost certainly exceeded.

It is true, that buried in the pages and pages of detailed information provided to everyone who took out such a policy, was the caveat that investments can go down in value as well as up. However, in my experience it was buried in the small print and never given any real prominence by any of the leading insurance companies I dealt with.

I myself lost money on endowment policies and took what was left of my money out in the late 90’s and reinvested it. The vast majority however, did not and have been left with a lot less than they were effectively promised would be there at the end of the term.

When you realise that your endowment will have a shortfall, it can feel as though your entire world is crumbling around you. As I have shown earlier, there is no need to go into a blind funk, there are options available to you, unfortunately none of which are ideal.

If any of you would like more detailed information on any aspect of Endowment Policy Shortfall, send me an e-mail and I’ll be pleased to advise further.