As the effects of the credit crunch widen there are heightened concerns about the safety of insurance and investments. While there is plenty of discussion about bank deposits and savings, there has been little media coverage about the safety of endowments and protection for policyholders.

It is vital to get professional financial advice before making any decision and only general information is provided here. The financial and regulatory environment is constantly changing and personal circumstances are unique. With that caveat it would be reasonable to say that endowments are a comparatively safe financial product amidst the turmoil and uncertainty of the credit crunch.

An Endowment policyholder has the protection of the life office being regulated by the FSA and the security offered by the Financial Services Compensation Scheme. In the event of company collapse the FSCS could pay compensation, the maximum being £48,000 per person (100% of the first £30,000 and 90% of the next £20,000). The life insurance component of the endowment is also offered some protection by the FSCS. An example where this could be required is if the policyholder dies and the company is unable to pay or goes into liquidation. With long term insurance 100% of the first £2,000 plus 90% of the remainder of the claim could be paid. There are conditions relating to the payment of compensation.

The £48,000 limit would cover many endowment holders in the unlikely event their company was unable to pay out although some have more than this at stake. While the “too big to fail” argument doesn’t always hold,  policyholders may be reassured that governments and central banks seem ready to step in or facilitate novel solutions where there is systemic risk. This may ease the fears of those whose risks exceed the cover offered by the FSCS. Much of the current problem was created by privately traded insurance products which were deliberately obscured. Finally,  insurance companies are beginning to disclose their exposure to certain risks as Aviva and others have done regarding AIG. While this is welcome for endowment holders, and every other financial consumer, transparency is an essential step towards recovery and security.

Comfort may also be taken for the fact that the TEP market is functioning well. The price and desirability of policy still depends on the usual factors though. Dramatic falls in equity and property markets may be a risk to policy values although this is more of a problem where bonuses have not been announced.

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Friday, September 19th, 2008 You can leave a response, or trackback from your own site.