There was a further round of bad news this week for the three million remaining endowment holders in this country, as policyholders at CGNU, Britain's biggest insurer, were told of dramatic cuts in the value of both annual and terminal bonuses. Many of the group's 1.4 million endowment holders have already been told that they are likely to face a shortfall at the end of their mortgage term, because initial assumptions used to predict the growth in the size of their fund have since proved largely over optimistic.

Endowment policies are a standalone investment vehicle that incorporate an element of life insurance, usually used to accompany an interest only mortgage. With-profits endowments see annual bonuses added to the value of the fund each year, and a major lump sum, known as the terminal bonus, at the end of the term. If the predictions of growth used at the outset prove to be accurate, the policyholder will have enough to repay their mortgage debt when their mortgage term ends.

However, many consumers in recent years have found that their endowments are not amassing enough money to stay on track to do this - a situation that will be dramatically worsened by cuts in annual and terminal bonuses. If the repay the loans on their homes. If it the endowment is not sufficient to repay the mortgage loan, the difference must usually be made up with money from elsewhere, including the enforced sale of the property.

Some annual bonuses on 10 year endowments have been cut by almost 20 percent, while a number of terminal bonuses have been cut by almost 50 percent. The terminal bonuses on 25-year endowments have been reduced by up to 28 percent. At the beginning of last year, monthly payments of £50 would have yielded a terminal payout value of £86,029, a figure which has now been slashed to just £73,640.

And it could have been much worse for policyholders, had the group not followed a policy of 'smoothing', which permits insurers to use their "excess assets" to bolster returns in poor years.

Mike Urmston, chief actuary for the group, explained: ""These new rates need to be set against the backdrop of stock market performance in 2000 and 2001. The very poor performance of the stock markets has had a direct impact on the value of with-profits funds and this has to be reflected in bonus rates and payouts. The with-profit fund showed a negative return of 9.6 percent during 2001 against our projected return of 7.5 percent. A strong degree of smoothing has taken place within the fund, enabling us to benefit all policyholders with competitive payouts. Payouts are likely to fall further in the longer term, reflecting anticipated lower investment returns compared to those enjoyed in the 1980s and 1990s."