Life offices have welcomed the ABI’s move to regulate the frequency of endowment policy reviews with the launch of a new endowment mortgage code.
Under the code, which is expected to launch in July, insurers will be bound to send policyholders regular reviews providing earlier warning of potential shortfalls. Suzanne Moore, spokesperson at the ABI, said: “Once it is in effect, anyone with an endowment will have their projections checked every two years.”
The code was developed during 1999 in response to changing economic conditions but was superceded when the Financial Services Authority (FSA) ordered providers to adjust their projections and inform policyholders of the new projections. Moore said: “Prior to this there was no specific regulation – some policies had provisions for checks, others had none at all.”
Andy Young, mortgage network director at ZIFA, said this was good news for policyholders. “Anyone with an endowment needs to keep a close track on how their underlying investment is performing. With regular checks the impact of premium increases will be less severe.”
However Legal & General said it had been considering upping the frequency of its reviews for some time. Peter Timberlake, PR manager for housing at the company, said: “It will be useful for people to know how close their policy is to target. The market norm for policy reviews was every five years and in earlier times this was acceptable. But with a change in economic circumstances and levels of concern more regular reviews are appropriate.”
Likewise, Standard Life said it would be moving towards annual reviews. However, the vast majority of Eagle Star policyholders are already benefiting from annual reviews, while Allied Dunbar customers can request reviews at any time.
But Ray Boulger, senior technical manager at John Charcol, questioned the value of such frequent reviews. He said: “Policyholders could find that after two years of strong performance the returns are favourable and most would receive green letters. But in the next two years, if performance was not so good they could end up with red or amber letters. This could lead to a lot of confusion – we need to review endowments over a reasonable time horizon to iron out any peaks and troughs.”
Meanwhile, the online policy trawling service freetrawl.com has questioned the calculations behind letters being sent to policyholders. Providers now have to base new projections on 4%, 6%, and 8% and these figures can be calculated on the surrender value of the policy or its share asset value.
But David Carrington, director at freetrawl.com, said the difference between the two calculations can be significant. Using the example of a 28-year policy from a leading life office, set to mature in 2016, the difference between the two calculations is a massive 54.12%.
He said: “I am worried that people are being asked to make a huge financial decision based on limited information. The ‘values’ which the review letters show do not reflect the true value of the policy if the policyholder continued paying premiums to maturity, and this makes the projections look far worse than they may well be.”