Home

CHAPTER 10

THE GRAVY TRAIN

10.1The Life Assurance Companies Know the Facts
Print

We have now revealed all the latent symptoms of the diseased entity that is the Endowment Mortgage Contract ———— All but ONE.


WHY have the Irish Life Assurance Company and their tied agent, the First National Building Society, and, to an equal extent, other Financial Institutions, gone to such lengths to perpetuate the sale of Endowment Mortgage Contracts?


AND, more particularly, why have the Management Personnel of these Financial Institutions gone to such lengths to perpetuate the sale of Endowment Mortgage Contracts?


Why have they abused the trust and confidence reposed in them?


Why have they forsaken all Honour ?


Why have they forsaken the tenets of utmost good faith, professional integrity, legality, appropriate advice, honesty and truthfulness ?

 

Why have they embraced Fraud at each and every turn?



The following principal reasons are now clear:

(1)

They have created, within their contracts, mechanisms whereby they can ‘cream off ’ the entirety of the 1st year’s Premium Payments and 4% of each subsequent year’s Premium Payments.

(2)

The Borrower is effectively locked-onto paying the Lending Institution’s Variable Interest Rate on the Full Amount of the loan for the Entire Duration of the loan.

(3)

The Borrower is effectively locked-onto the Lending Institution’s interest rate policy (i.e. the manner in which they charge interest to their clients) over the ENTIRE Duration of the Loan. This interest rate policy may be very much to the detriment of the Borrower.


As we have previously shown (in Section 6.4: The Potential to Inflict Financial Injury), where Financial Institutions who compound interest annually engage in the practice, whereby the interest due they charge for each month throughout the year is computed on the basis of the Opening Balance on the Borrower’s Loan Account at the start of the year, this can have a seriously negative impact on the Borrower’s financial position. First National employed such an interest rate policy.


In addition, First National’s interest rate policy (a policy also adopted by some other Financial Institutions) was such that it imposed a higher interest rate charge on the locked-on Borrowers than that being quoted to new Borrowers.

—— Financial Institutions who adopted such a policy had unfair advantage over competitors who did not.

—— Such a policy also took unfair advantage of the borrower who, ignorant of the fact that he was being quoted what is now sometimes referred to as a discount rate, was given the false impression that he was comparing like with like, when comparing lending rates being quoted by the various Financial Institutions.

—— Unless the lending rate being charged to locked-on-borrowers was disclosed to him, prior to or at the time of contract, he was, in effect, deceived.


Also, even when First National finally began to compound their interest charges on a monthly basis, their interest rate policy at the time was such that, for Borrowers who took out their Mortgage prior to the date when First National changed from compounding their interest charges annually to compounding them monthly, First National continued to keep those Borrowers locked-onto their system of compounding interest on an annual basis.


(4)


The Borrower is effectively locked-onto an Investment Product to which Conditions are attached that generate continuous income for the Life Assurance Company, with no penal linkage between that income and their non-performance in the Management of the Investment Product.


(5)


The Borrower is effectively locked-onto an Investment Product to which Conditions are attached that incorporate ‘Rules and Resolutions’. These Conditions, together with the ‘Rules and Resolutions’ they incorporate, give considerable discretionary powers to the Life Assurance Company both directly, and through their Actuary that effect a control over the value of the Endowment Fund to the Borrower.


But there is yet another reason why the Life Assurance Companies perpetuated the sale of Endowment Mortgage Contracts.





It is important to realise that the Life Assurance Companies ARE Insurance Experts.



Insurance expertise requires a detailed knowledge of Probabilities, based on a detailed knowledge of Statistical Facts. The Life Assurance Companies have accumulated the statistical data on their various products over many years. The Life Assurance Companies are therefore in possession of all the Statistical Facts relating to their various Investment Products; such investment products include Life Assurance, Pensions and Endowment Mortgages.


The Endowment Mortgage Gravy Train is perpetuated because of the Life Assurance Companies’ knowledge of these Statistical Facts.



The Life Assurance Companies know all the Statistical Facts with regard to the number of Endowment Mortgage policies surrendered before they reach maturity. The Life Assurance Companies know the Probabilities that you, or I, or any individual Policyholder, will cancel the Endowment Mortgage Policy at any time throughout the Term of the Policy.


THEY HAVE KNOWLEDGE OF THE FACTS.

We (the rest of humanity outside the Life Assurance Companies Circle) do not have direct access to these Statistical Facts.


------------------------------------------------------------------------


BUT, some Statistical Facts have become available through studies of Endowment Mortgages done independently of the Life Assurance Companies.


Consider the following studies:

(a)

‘Sunday Times research has revealed that about 20% of Endowment holders cancel Policies within the first three years’. (Ref : Sunday Times 4/4/99, Article on Endowment Mortgages by Nick Gardner, Deputy Money Editor.)

(b)

‘A report by Suffolk Trading Standards Officers in January found that Advisers were driven by commission instead of the needs of home owners. Three-quarters of Buyers surrender their Policies before they mature.’ (Ref : Financial Times 26/7/99, Article on Endowment Mortgages by Scheherazade Daneshkhu.)


NOTE!
The information contained in the above studies was published in two high profile U.K. newspapers, the Sunday Times and the Financial Times. The U.K. Financial Services Authority and the PIA would therefore have been fully aware of this information. Note particularly the dates on which this information was published. It was published well before the December 1999 'Public Warning' issued jointly by the PIA and the FSA and well before the October 2000 FSA Progress Report on Endowments. (See Section 2.5.8: The Appalling Vista.)   


Know this, and know it well! — It is the objectively logged factual data, recording the investment actions of you, and I, and everyone else who has ever invested in an Endowment Mortgage, that go to make up these Statistical Facts.


------------------------------------------------------------------------


From (a) we can deduce that 20% of Endowment Mortgage Policies are encashed before the End of Year 3 of the Policy.


From (b) we can deduce that 75% of Endowment Mortgage Policies are encashed before they reach maturity.
For a 15 Year Endowment Mortgage, maturity will be at the End of Year 15. For a 20 Year Endowment Mortgage, maturity will be at the End of Year 20.


These figures, 20% and 75%, represent the Cumulative Percentage of Borrowers / Policyholders who encash their Endowment Policies before the End of Year 3, and before reaching Maturity, respectively.


Therefore, for Endowment Mortgage Policies, we KNOW three points on the Cumulative Frequency Curve that represents the Cumulative Percentage of Borrowers / Policyholders who encash their Endowment Mortgage Policies before the End of a Specific Year over the Endowment Mortgage Policy Duration.

These three points are:

1. The Origin
2. The Cumulative Percentage value at the End of Year 3, i.e. 20%
3. The Cumulative Percentage value before Maturity, i.e. 75%


This is significant 'HARD INFORMATION'.

FOR, it is also KNOWN, from STATISTICS (i.e. the branch of Mathematics called Statistics), that the shape of a Cumulative Frequency Curve is ogive (i.e. S-Shaped).


We can therefore superimpose an Ogive (S-Shaped Curve) on these three KNOWN points for both a 15 Year and a 20 Year Endowment Mortgage Policy Term. The resultant graphs represent the Cumulative Percentage of Borrowers / Policyholders who encash their Endowment Mortgage Policy before the End of any particular Year.


------------------------------------------------------------------------


Remember that, with an Endowment Policy with Irish Life, Bonus is added over the last 5 years of the Policy! (See Section 4.9.1: An Apparent Additional Benefit.)


From these Cumulative Frequency graphs for a 15 Year and a 20 Year Endowment Mortgage Policy Term we can therefore interpolate the Year 10 and Year 15 values, respectively, for the Cumulative Percentage of Borrowers / Policyholders who encash their Endowment Mortgage Policies before the End of these years. (See the graphs below.)

 

15 YEAR ENDOWMENT MORTGAGE






20 YEAR ENDOWMENT MORTGAGE

 

------------------------------------------------------------------------


In the case of the 15 YEAR ENDOWMENT MORTGAGE, the interpolated value of the Cumulative Percentage of Borrowers / Policyholders who encash their Endowment Mortgage Policy before the End of Year 10 is 64%. This means that 64% of 15 Year Endowment Mortgage Policies, with a Life Assurance Company where the Bonus System is similar to that applied by Irish Life, will NEVER achieve Bonus Units.


In the case of a 20 YEAR ENDOWMENT MORTGAGE, the interpolated value of the Cumulative Percentage of Borrowers / Policyholders who encash their Endowment Mortgage Policy before the End of Year 15 is 70%. This means that 70% of 20 Year Endowment Mortgage Policies, with a Life Assurance Company where the Bonus System is similar to that applied by Irish Life, will NEVER achieve Bonus Units.


Note!
The Superimposed Curves, as shown above, are illustrative of the ‘maximum likelihood’ Ogive incorporating the respective KNOWN Cumulative Frequency figures. Remember the Life Assurance Companies (in this case Irish Life Assurance) are in possession of THE FACTS !


Note!
An immediate deduction from the report by the Suffolk Trading Standards Authority (see above) is that, in the case of 75% of Endowment Policies whose Bonus System is structured such that the Value at Maturity is DEPENDENT ON the addition of Terminal Bonus, this Terminal Bonus will NEVER be achieved. Again, it must be stressed that the Life Assurance Companies KNOW The Facts.

 

Copyright © 2013, 2014 John O'Meara. All Rights Reserved.