Life Life policy query

D

DirectDevil

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Reviewing two life assurance policies with my elderly uncle.
Something strikes me as odd about profits on the policies.
I would be glad to have any opinions as this is not my field.

POLICIES.

He took out 2 "TWP WP ENDOWMENT" policies, one in 1976 and one in 1980.
The policies are with the Irish branch of a major UK life assurance company.
The policies are written on the basis of guaranteed with profit benefits.
Right enough each years' profits are added and there is a guaranteed with profit benefit figure.
The latter figure is the accumulated profits.

PROFITS.

From inception there were annual profits declared and added.
The oddness starts in 2008.
Every year from 2008 to 2018 yielded nil bonuses i.e. €0.00.
I appreciate that the investment climate fell off a cliff in 2008.
The nil bonuses probably reflect investment conditions to some degree.
I also understand that there is no right to expect a bonus every year.

SURRENDER ?

The policies have maturity dates about 2 years from now.
The surrender values are extremely low and not worth taking.
Due to good performance in early years it will still be profitable to pay premiums up to the maturity dates !

QUESTION.

How is it possible, plausible or credible that there are still no profits up to 31.12.2018 ?
I feel inclined to ask the company for an explanation but would be glad to have opinions first.
Many thanks.
 
Complicated beasts and good luck with getting a meaningful explanation from the company. My opinion is that these older "traditional" with-profit contracts were a bit too generous in giving out annual bonuses in the early years of your uncle's policies. Bear in mind that such bonuses cannot be taken back if he keeps the policies so the increased values are locked in. This was part of what sunk Equitable Life around the turn of this century - being locked into over-generous guaranteed payouts that they couldn't afford to meet. So my suspicion would be that when the big asset value dip came in 2008, remaining With-Profit funds got scared and adopted a belt and braces approach - reduced the risk of the assets in the fund - big switch to bonds - as well as cutting bonuses. Problem with that is that the more cautious asset allocation meant that they didn't participate in the asset value recovery from 2009 onwards. In your shoes, I think I'd be asking the company for two things: -

(1) A rough breakdown of what their With-Profit is invested in. Without knowing which one it is, I'd say that there's very little in equities and mostly bonds and cash. So unlikely to pay out an annual bonus again before your uncle's policies mature.

(2) Although final bonuses are not guaranteed, a reasonable question to ask them would be "what final bonus are you currently paying on 30 or 35 year policies of this type (whatever the term of your uncle's policies are) that are maturing in 2019?" While you've no guarantee that they'll be paying the same when your uncle's policies mature, it will give you an indication. With-profit companies can tend to give out more through final bonuses these days and less through annual bonuses, because they can cut or stop paying final bonuses any time they like if asset values fall.

Regards,

Liam
www.ferga.com
 
Hello Liam.

Thank you very much for that detailed and helpful information.

When you mentioned Equitable Life the term "guaranteed" and what that actually meant legally sprang to mind !!
 
A follow up.

On enquiry the company in question made the following core points ;

1. The recession of 2008 onwards required them to protect the funds under their management.

2. They adjusted their investments as follows ;
a) Government bonds - 85 %
b) Equities - 0.2 % and
c) Cash - 4.5 %.

3. There are unlikely to be any more profits before the policies mature in 2021.

4. The maturity bonuses - always understood as being discretionary in nature - are currently zero for one policy and tiny for the other.

What we are bemused about is the total absence of any returns at all from 2008 to 2019 inclusive !
We are also wondering if the particular fund in which the policies existed is in some way cross subsidising other policyholders profits ?
 
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Could there be an Annual Management Charge (AMC) taking up the profits perhaps? If it was in Equities it would have skyrocketed in the past decade but in the much lower returning assets like Bonds or Cash (if anything cash is just Cannibalised money over the long term due to inflation) then an AMC could eat all the gains. . . Just a Thought?

Let us know if you have had any further developments on this. Thanks
 
I spent the first 12 years of my career winding these up for clients.

You need to conduct a detailed analysis of the contract to establish the best course of action we have had cases in the past where the surrender value was greater than the maturity value.

Very complex products and easy to make a rash decision
 
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