Endowment mortgages still causing problems

Endowment mortgages continue to create ripples. The main selling period for endowment mortgages was in the late 1980s and early 1990s. A monthly investment into an insurance policy was supposed to earn enough to pay off a mortgage amount after 25 years of investment – and leave the investors with a handy cash sum left over to do with as they wished. The policies are now largely discredited and most will not achieve their original targets.

There are still more than 200,000 people who bought endowment policies who are owed compensation to a total of £200m as the marketing material of insurers did not make clear enough the impact of charges on future returns of their policies.

The September issue of Money Management magazine reports that the new controversy is set to entwine insurers such as Standard Life, Prudential-owned Scottish Amicable, and Resolution-controlled Scottish Mutual.

Endowment providers were allowed to use ‘standard’ charges when they gave illustrations of future maturity values to potential clients when endowment selling was at its peak between 1988 and 1995. These meant that the illustrations were exactly the same for all companies, but the charges applied were not; some were much higher than for other companies, and the result was that there was an immediate risk of a shortfall in policies as soon as they were taken out.

Insurance giant Standard Life, for instance, charged customers £36.24 a month on a 25 year endowment designed to repay a £25,000 mortgage. However, if it has used actual rather than ‘standard’ charges, its premium would have been £40.16. The result is a shortfall of 12% - £2,700 – which was built in from the start. Standard Life has decided not to pay compensation, saying that it ‘followed all the regulator’s requirements.’ HBoS owned Clerical Medical, by contrast, has decided to set aside £20m to meet the cost of claims.