Huge penalty for seeking maturity

Britain's biggest life insurance company has turned traditional "with-profits" policies on their head. The Prudential has told a customer he would have been better-off surrendering his endowment plan early, rather than waiting until it matured.

As a result of fulfilling his contract by waiting until the final day, the policyholder has lost £1,800 - as well as a further £200 in premiums to Prudential offshoot Scottish Amicable and interest.

The Prudential move to make a surrender value higher than the subsequent maturity payout reverses over a century of insurers advising customers to keep policies wherever possible until the final payout day.

The Prudential decision, which was dubbed "bizarre" and "an aberation" by with-profits experts, means many policyholders will need to check plans regularly - destroying the previous certainty that cash from a with-profits plan would always be at its highest at maturity.

Insurers have previously defended low surrender values by saying customers should be penalised for ending contracts early. Here the penalty is for continuing to the end.

Professor Andrew Boon, who heads the law school at the University of Westminster, bought a Scottish Amicable endowment in 1977.

"As the maturity loomed I was anxious about whether the policy would cover the mortgage and asked for details of the likely value. After long delays I received a statement which suggested that the current surrender value of £28,690 would be more than the predicted maturity value of £27,199 some weeks later. This seemed upside down and a reversal of what I had been led to expect so I asked them for an explanation," he says.

But the Prudential, which deals with all Scottish Amicable matters, was less than helpful.

"They told me they could not confirm that the statement was likely to be correct and nor could they give me financial advice and that I should consult an independent financial adviser. I spoke to First Direct who said that they had never heard of such a thing," he says.

He decided to wait for maturity when the value paid out, £26,898, was even less.

Professor Boon tried to find out what had happened. "I've had a letter and a couple of phone calls from Scottish Amicable, none of which were very informative. They point out that I was lucky to cover the mortgage loan and get a terminal bonus (£6,673.97) at all."

When Jobs & Money asked the Prudential about the affair, its spokesman prefered to dwell on the overall results rather than the £2,000 loss.

He said: "The return that Professor Boon, for example, has seen is almost certainly better over the long term if compared to unit trusts and cash deposits."

Professor Boon says: "I can't help feeling they were economical with the advice. In particular, they were unwilling to confirm that the details in the statement were likely to be correct and have always seemed very cagey about the discrepancy between surrender value and the maturity sum."

Tracey Merritt, the with-profits expert at traded endowment firm Beale Dobie says the decision does not make sense. "This is bizarre. By definition a surrender value must be lower. You cannot make a decision on what he was given. He should challenge this with Scottish Amicable and take it to the ombudsman. This is exactly the sort of thing the Sandler report criticised," she says.

Brian Goldstein at rival endowment dealer Policy Portfolio believes this is "a nonsense and an aberation but not unique. We have seen this a few times over the past months".

And Colin Jackson, at IFA Baronworth, states: "This blasts the whole point of with-profits out of the water. It makes a nonsense of waiting for maturity. If this becomes normal, policyholders will have to check values every month. It also casts doubts over buying in second-hand policies."

The Prudential, which has refused to reconsider its decision, says the higher value was given because the surrender would have been in the 2000 policy year while the maturity took place with the lower 2001 rates even though both quotes were made at the same time.

It adds: "We clearly told Professor Boon exactly the value of his investment."