Prudential, one of the UK’s biggest insurance companies, has revealed that the value of its maturing with-profits mortgage endowment policies has fallen.
This is despite the value of Prudential’s with-profits fund increasing in value by 16% over the past year.
Figures released by Prudential reveal that a £50-a-month policy maturing in May 2010 after 25 years will pay out £35,834. This compares to £37,738 for a similar policy maturing in May 2009.
Endowment policyholders with the UK’s other big insurers Legal & General and Aviva have seen similar reductions in maturity values too.
Prudential has over 460,000 customers with with-profits endowment policies linked to the repayment of the policyholder’s mortgage (this figure includes Scottish Amicable endowment policies).
In 2008 all of the Prudential and 98% of the Scottish Amicable endowment policies were still on target to pay off the mortgages they were designed to repay.
However, the situation changed dramatically in 2009. Of the 14,871 Prudential policies which matured in 2009, 3,823 (or 26%) did not meet their mortgage repayment target. The average mortgage shortfall was £1,100.
The situation with the Scottish Amicable policies in 2009 was worse; just over 19,000 (or 50%) of the 37,663 policies that matured last year missed their target amount. However, the mortgage shortfall was lower at £850.
Maturity values to continue falling
The trend of reducing maturity values on both Prudential and Scottish Amicable is expected to continue over the next few years, making the mortgage shortfall gap wider and wider. Homeowners will be expected to plug the shortfall using other funds.
While this trend of lower maturity values will be of concern to Prudential policyholders, it is the policyholders of the other big insurers, such as Legal & General and Aviva, who should be more concerned.
Earlier this month, Legal & General revealed that just 5% of its endowment policies were still on target to hit their mortgage repayment targets. A £50-a-month policy maturing this year after 25 years will pay out £34,486. This compares to £36,414 for a similar policy maturing in 2009.
The maturity values being paid by Aviva are even lower. A £50-a-month policy maturing in January 2010 after 25 years paid out a paltry £27,884 if it was invested in the old Norwich Union with-profits fund. This maturity value was significantly lower than that projected to be paid when the policy was started in 1985. As a means of comparison, an equivalent Norwich Union 25-year policy maturing in 1998 would have paid out just over £100,000.
Aviva expects nearly of its mortgage endowment policies are unlikely to hit their original targets, which will leave a significant number of homeowners with mortgage shortfalls.
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