Andrew Verity BBC personal finance reporter

UK insurer Friends Provident has heightened anxieties for homeowners with endowment mortgages by warning that payouts from their endowment policies will fall even further.

Falling payouts

25 yr policy: �93,145 in 2001 �77,096 in 2002 10 yr policy: �9,420 in 2001 �8,126 in 2002

More than 700,000 homeowners are relying on Friends Provident policies to pay off their mortgages when they mature.

They hold endowment mortgages, where they pay only interest until the end of the mortgage term, typically after 25 years.

Market woes

At that point their maturing endowment policy must be worth more than the original amount borrowed. If it is worth less, they could face shock demands for thousands of pounds to make up the difference - just when they thought they had paid off the mortgage.

Friends Provident said payouts on with profit endowment policies would fall - an effect of slumping stock markets which have meant it has not been able to make as much money for its customers.

A payout on a 25-year endowment policy maturing this year would fall to �77,096 - compared to �93,145 had it matured last year.

Similarly, a 10-year policy taken out in 1992 would pay just �8,126 this year, compared to �9,420 for the same policy maturing last year.

Widespread problem

Across the country more than 6 million people have endowment mortgages which rely on endowment policies to pay off the original loan.

In the last two years, some 500,000 endowment holders have been sent letters coded "red" - warning that their policies are likely to be worth too little to pay off their mortgages.

Around 2.5 million households have "amber" letters - warning their policies are in some danger of falling short.

Until now the rest - around half the total - have stayed on track.

But Friends Provident's announcement shows that last year's poor investment climate - where the FTSE-100 index fell by nearly 16% - has made matters worse.

Next month it will begin mailing its endowment mortgage customers for the second time.

It is expected, as with other life insurers, that more customers than before will receive the most serious warnings, coded "red".

Separately, Friends Provident boosted profits in the second half of the year, to �196m in the year to 31 December compared with �125m in the previous six months.

After a difficult six months in the first half of the year, sales picked up in the second half.

On one measure, sales jumped 47% to �140m.