With-profit returns hit by stockmarket woes
The turbulence of stockmarkets in 2007 has hit Legal & General and LV= with-profit policyholders, with both firms revealing a slump in performance during the year.
L&G policyholders saw a return of 5% in 2007, down from 12% the previous year, while LV= funds achieved returns of 5.7% in 2007, down from 11.2% in 2006.
An L&G with-profits fund maturing on 1 March 2008 will achieve a maturity value of £44,966 while a policy maturing on the same date in 2007 made a return of £45,399.
For LV=, an endowment maturing on 1 March 2008 had a value of £61.625, down from the £63,905 achieved by the same product maturing a year earlier.
However, both L&G and LV= mortgage endowments saw better results than some of their peers.
LV= has a mortgage endowment guarantee, meaning that all policies will be paid to meet the mortgage amount regardless of whether they are in shortfall or not.
The friendly society reports that a 20-year mortgage endowment policy will mature on 1 March 2008 with a value of around £71,388, a surplus of £21,388.
L&G, despite not having a mortgage endowment guarantee in place, reports that the number of policies at risk of a shortfall has fallen from 40% of its book to 28%.
A 25-year mortgage endowment policy maturing on 1 March 2008 from L&G will have a maturity value of £43,637, giving a surplus of £12,106.
With-profits funds are administered by life assurance companies and access to them is through the life company’s products such as bonds, endowments and pensions. Your monthly contributions are pooled with other investors’ money and invested in a mixture of shares, bonds, property and cash. Each year, a “reversionary” bonus (a declared percentage) is added to your investment and a large part of the policy’s final value depends on these bonuses during the investment period. In years when the with-profits fund performs well, some of the return is held back and paid out in years when the fund does badly and this “smoothing” process makes with-profits investments unique. When the policy matures, the life company may pay a discretionary “terminal bonus”.
A contract written by a life assurance company to pay a fixed sum (“the basic sum assured”) to the assured person on a fixed date in the future or to their estate should the person die prematurely. The policies normally run for five, 10, 15, 20 and 25 years. Monthly premiums are calculated on the age of the life insured, the basic sum assured required at maturity and the length of the policy, so each policy is unique. The policies can be with-profits or unit-linked (see separate entries). A common investment product during the 1980s, endowment policies were sold alongside interest-only mortgages and designed to provide enough money to repay the capital borrowed at the end of the mortgage term. However, mis-selling scandals and poor investment performance discredited endowments as a mortgage repayment method.