Endowment provider lowers the price of early surrender: Vincent Duggleby reports on improved values for life policies

A LEADING life insurance company is set to announce a far-reaching change to the terms of its endowment policies. As a result, policyholders forced to surrender through no fault of their own will have all their premiums refunded.

Those who simply change their minds and wish to surrender within the first five years will also get a substantially increased payment.

The move by General Accident Life Assurance (GA) comes as the Securities and Investments Board is working on the guidelines for full commission disclosure by financial advisers. These follow recommendations by the Office of Fair Trading, which were endorsed by the Chancellor, Kenneth Clarke.

The new rules, expected to come in during 1994, will require offices to disclose how much of the premium goes in charges and commission and what happens if a policy is surrendered early.

As part of its new deal for policyholders, GA is also bringing in a system of level commission for advisers over the whole term of the policy. The current arrangement pays everything up front and therefore depresses the surrender value in the early years.

At present, a 25-year-old man paying just under pounds 40 a month in premiums on a pounds 30,000, low-cost endowment over 25 years would get back only pounds 536 of his pounds 960 outlay if he surrendered after two years. GA Life will now be paying pounds 746, an increase of 39 per cent.

If the surrender is due to 'financial hardship', the full pounds 960 will be returned. Financial hardship will broadly cover such things as marital breakdown and divorce, long-term sickness and redundancy, but each case will be dealt with on its merits.

The return after two years for a man aged 25 with a pounds 75,000 policy (premiums pounds 98.11 per month) will be the full pounds 2,355 where there is financial hardship. Otherwise pounds 1,864 will be due, compared with pounds 1,337 under the old system, increasing the proceeds from 56 per cent to 79 per cent of the premiums.

According to an OFT study of 40 insurance companies, two-year surrender values average about 44 per cent of premiums paid.

The move will come as a shock to many financial advisers, accustomed to taking all or most of their profit in the first year when the policy is sold, although GA does claw back some commission if surrender takes place in the first 38 months. Under the present system, an adviser selling the above pounds 40-a-month policy would be paid pounds 413 - 86 per cent of the first year's premiums. Advisers argue this is not unreasonable for the amount of work that has to be done and the fact that many sales fall through.

However, it has led to accusations of commission bias, especially over selling endowment mortgages. In May, a survey by the Consumers' Association magazine Which? claimed: 'Advisers frequently twisted the facts to recommend endowment mortgages linked to life insurance policies, which can make hundreds of pounds commission for the adviser or big profits for the bank or building society that employs them.'

The new arrangements mean that advisers recommending a 25-year General Accident policy will get a monthly commission of pounds 3.68 - 9.1 per cent of the premium - for each year that the policy remains in force. So it will take 10 years to earn the commission that they now earn at the outset.

The company evidently hopes to answer the criticism that low-cost endowments are less flexible than repayment mortgages when customers' circumstances change, though there is a question mark over exactly what would happen to the commission in later years if the policyholder was persuaded to switch to another adviser.

Apart from business generated by independent advisers, GA has ties with eight building societies: the Cheshire, Derbyshire, Dunfermline (from 1 January), Ipswich, Leeds & Holbeck, Newcastle, North of England and Skipton.

In 1995, however, GA will start underwriting policies and providing administrative back- up for the new life company being set up by the Halifax building society after it cuts its link with Standard Life at the end of next year. Similar arrangements are in hand to handle policies for the fifth largest society, the Leeds, which recently called off its proposed merger with the National & Provincial.

No one wants to give the impression that policyholders are simply being given an easy way out of what should be a considered commitment, or that there is concern about long-term investment performance. Many companies have been forced to reduce bonuses on with-profits policies in the past couple of years, but GA Life is currently the top performer on 25-year endowments.

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