I'm planning to sell a 15yr old with-profits endowment policy. I've asked for the surrender value, but not seen it yet (they are taking there time, its been 2 weeks now). The policy is left over from a property that is now sold and mortgage redeemed.
Part of the "sell or retain" decision is to work out what proportion of the payments I've been making have been to provide the life cover element of the policy. I'd like to know this so I can work out what kind of return I've managed to get from the various offers I get when I put the policy to the market.
I'm guessing the amount is a factor of the joint policy holders age at the start of the policy. Maybe there is a table somewhere with historic values?
One other question... if I sell the policy does this count as income for tax purposes or capital gains or tax-free?
How bizarre. Suppose you get 3 offers, which place a value on your policy which represents average returns of 6%, 7.5%, and 9% respectively, on the investment element of your premiums. No prizes for guessing that you'll pick the third if any, but what benchmark would you use, and why, on which to base your yes/no decision?
Certainly not income. And there certianly won't be any CGT unless there has actually been a capital gain. Even if there has, this will be exempt, I gather, if you've held the policy for long enough. I don't know what the minimum duration is, to qualify for this, but I've I feeling it may be 10 years, so you should be in the clear.
Well my thinking, flawed though it might be, is that if the market price for the policy is the equivalent of a good return, say around 9% on the investment part of the payment, then I'd be more inclined to hold onto it for a while. Working on the assumption that such a return indicates there maybe life in the old dog, so to speak. However, if the return is low, like around 3%, then I'd be more included to sell and plonk the proceeds in a tracker fund. (Though past performance blah blah blah...)
But really I'll probably sell anyway and just want to know how to retrospectively know what term assurance I would have paid for the life cover part of the policy so I can work out the real rate of return. For my own satisfaction or, perhaps more likely, disastisfaction!
Therein lies the key. At best, past performance may be an indicator of how good the product has in the past, and may in future, perform *relative to* other investments available at the time. A buyer's offer will represent their view based on what their crystal balls tell them about the future.
Just think about the tax free dosh you'll be passing up on. BTW, another thing that will skew your calculation is that even if you know how much of your premiums went on life cover, it's still not the case that all the rest went into the investment, because typically 100% of the first or 60% of the first two years' worth went in sales commission. :-(
of the payments I've been making have been to >>>provide the life cover
kind of return I've managed to get from the ???>>>various offers I >>>get whenI put the policy to the market.
Simon
Just a few thoughts. Life cover varies according to age and so I would guess that the life cover element of your premium would be much smaller at the start of the policy than after 15 years. This would make it difficult to arrive at a definitive figure for the cost of the life cover over the period. If you wanted to know what the life cover element was worth today then perhaps you could simply get a quote, from an insurance company, of what they would charge you for life insurance cover only, now.
I suppose the matter is complicated by the fact that there are joint policy holders and therefore you would need to define the insurance element for the other party as well. Even if there is a historical table available surely you would need to refer back to 15 years ago when you took out the policy as the value of money is much reduced today. Sorry for babbling on but I think your question is very relevant to lots of people.
Just to complicate things. Suppose a couple divorce and sell the house and one party, let us say the husband, becomes sole owner of the policy. Would it be possible for him to remove his ex-wifes life-cover from the policy. After all it may be of no significance to him and he must be paying some part of continued premiums for her life cover.
ISTM that we are woefully ignorant about the ways these policies operate. It would help greatly if a little more light was shed on the matter so that policy holders could understand exactly what they are paying for. The insurance companies must know at the onset of the policy exactly what part of the premium represents life cover. Why not tell us!
Yes very true. I can recall about two years into my endowment when I got sent some bumph which included a breakdown of the sales commission. I was very surprised and annoyed about how much was being paid and how much would continue to be paid some years into the policy. (This was not explained to me at time of purchase, nor was risks and the other 'grounds for complaint' -
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is worth a look)
I'm currently debating whether to put in a mis-selling compensation claim and was pleased to find out you can claim even if you have sold the policy.
Incidently, I've addressed my OP question, which was effectively "how much would the level term cover part of my endowment have cost 15 years ago" by getting an online quote for a couple 15 years younger than my wife and I are today. Todays market prices used so perhaps not super accurate. But sufficient to get an idea of the rate of return on my endowment started in 1988. Based on current first quotes back from some brokers this has been a little over 6%. Not exactly a good performance but perhaps better than I had expected. Just about. Furthermore, if you consider the tax free nature of the return (we are
Not necessarily. Take the case of a traditional with profit endowment. When pricing (setting the premium), the life office might think "I don't really know what the life cover will cost over the next 20 years, but I reckon it'll be less than 'X'. So we'll put 'X' into the premium rates, and when we know (later) how much less the life cover has actually cost, we'll increase the bonuses paid on the policy appropriately."
Point taken, Tim. They clearly have this flexibility with a "with profits" endowment. Presumably, with a non-profit life insurance policy they have to get their figures right at the outset (unless they have the power to re-evaluate the policy and increase the premiums at some future date). It would be very interesting to know the answer to the original question. How much of the premium of an endowment policy actually pays for the life insurance element? The "with profits" element is clearly a variable but the premium is a constant and it must surely be possible at some point to know how much of the premium actually represents life cover. Take the case of a
25 year "with profits" endowment policy running for the past 15 years. The annual premium is 400 and the (joint) life cover is 17,000. What proportion of this premium (approximately) would represent life cover? I understand that if the policy is made "paid up" then the life cover would probably stop. So I would hazard a guess that the life cover must represent a significant part of the premium.
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