IN June 1992 Mr D from Dublin's north side arranged a substantial mortgage against his private residence in order to secure a loan on a commercial property. The lender encouraged him to take out an endowment mortgage, partly because the automatic life cover also doubled as mortgage protection insurance. The endowment part of his sizeable loan - £150,000 - was nearly £450.00 a month. This was in addition to the actual mortgage payment.
In the three-and-a-half years that he held this endowment mortgage, Mr D and his wife paid nearly £19,300 to Friends Provident for the endowment policy. Unexpected financial difficulties earlier this year required that the endowment be discontinued. When he went to encash the policy, he found it to be worth just £3,400, nearly £16,000 less than he paid in.
Mr D has joined the ranks of thousands of other endowment mortgage holders who have suffered serious losses by encashing an endowment early. He feels very aggrieved that the insurance company would offer him what he described as such a "derisory" amount. "Nobody in any other business could get away with offering such poor value or returns on an investment," he complained to Family Money. "I just don't know how they can get away with this and I am considering lodging a formal complaint to the Insurance Ombudsman."
Unfortunately, the Office of the Insurance Ombudsman is not permitted by the Irish Insurance Federation, which set up the office, to investigate complaints dealing with fund values. But even if this case was investigated, we suspect Mr D would still find himself seriously out of pocket: the nature of endowment mortgages is that substantial costs are deducted in the first two years in the form of commissions and other setting up charges.
Endowment funds seldom break even much before the 10th year and in the case of with-profit or unitised with-profit funds much of the real value of the endowment policy is achieved towards the latter years as the bonuses accumulate and then at the very end with the substantial final bonus.
Mr D ruefully admits that he did not fully understand how the endowment worked, or its cost structure; had he done so, he says he would never have taken out the policy. Unfortunately, losing £16,000 is an expensive way to learn such an important lesson.