Last knockings for a policy on the way out

The men from the Pru - or what remains of that endangered species of door to door insurance agents - won't be knocking with an endowment mortgage any more.

The Prudential, Britain's biggest life company, has decided to pull out of endowment policy linked home loan repayment schemes - the latest in a long line of life insurers which includes Scottish Widows, NatWest and Lloyds TSB.

The Pru says it has made the decision for "economic reasons". It says low sales of the controversial schemes have made it too expensive to stay in the market. The life office denies that it has pulled its plans because they have been criticised as expensive, inflexible, and increasingly unlikely to pay off the loan on maturity as promised. "This does not imply a judgment about the suitability of endowments," the Pru says.

But it could hardly make an adverse judgment as this might give the 300,000 who still have Pru mortgage endowments the ammunition to demand compensation if their plan does fall short.

CGU, the amalgamation of Commercial Union and General Accident, has come up with a promise to increase payouts to cover the mortgage if there is any shortfall. But this pledge will be ditched if the average investment performance falls below 6% per year.

David Carrington at endowment traders PolicyPlus says that while "this scenario is unlikely, it is a positive step to reassure policyholders."

But many other endowment policyholders now face the stark choice of paying more in monthly premiums now or risking having to find a lump sum to redeem their mortgage. And the most recent spate of annual results from companies operating with-profits policies, the great bulk of plans backing home loans, can only add to those fears.

These plans offer a combination of life cover and investment vehicle plus a guarantee that their value can never fall back no matter how bad market conditions become.

Once a bonus is given, it can never be taken away. But they also suffer from high costs, including the need to pay commission to policy sellers which can strip out a fifth or more from the annual returns.

With profits companies declare two types of bonuses. "Reversionary" or annual bonuses, and terminal bonuses when the policies mature. Most companies this year have concentrated their publicity spin on their terminal bonuses.

But while terminal bonus figures are vital for 25-year endowment holders who bought a quarter of a century ago and whose policies have now matured, they give no indication of the future value of more recent plans.

Terminal bonuses are a year-to-year decision, with this year's having no impact on those still to come. Of the 12 major offices which have so far reported, eight have dropped their total 25-year payout including the terminal bonus, while the four that did rise only produced marginal increases.

The bad news for continuing policyholders is that almost all reversionary bonuses are down, giving a lower base for future bonuses and a reduced final level for the terminal bonus.

The Halifax-owned Clerical Medical, which declared its figures this week, is typical of many in cutting its bonus on the basic sum assured from 2.5% to 2% although it did better than many in holding the bonus it pays on previous bonuses, a form of compound growth, at 4%.

Crusader Insurance, now has one of the lowest bonuses with a microscopic 0.7% on the sum assured, compared with 1.1% last year and 1.6% on previous bonuses, down a full percentage point over the year.

Mr Carrington says: "We have seen a continuation of the movement away from annual bonuses with more emphasis on terminal bonuses. This is due to the belief that we are in a low interest rate/ low inflation environment and we are likely to remain in this situation for the duration of many policies.

"There has been quite a range of terminal bonus declarations with life offices taking different views on last year's volatile stock market performance. There will always be quite a range in terminal bonuses."

But no one is prepared to say whether plans purchased during the 1990s will ever acheive promised payouts.