This article was last updated on 1 September 2021.
An endowment policy is a type of life insurance that does let you access and spend from your savings pool.
Some people prefer this. This is because if you have a traditional life insurance policy you never get to see any of the cash you’ve worked hard to save up.
An endowment plan is a type of life insurance policy but one that doubles up as an investment fund. In addition to financial protection for your beneficiaries you get a nice helping hand in the form of a savings plan.
Life insurance with endowment savings is a lot more flexible when compared with a more typical life insurance plan. Payouts are made in one of the two following scenarios:
Here is a short video explaining endowment policies.
Policyholders often have questions about the option that will be best for them. Our rough guide can help you choose.
For tailored advice you will need to contact independent advisers. The good thing about doing this is that you can tell an adviser about your aims and circumstances. Then they help you make a decision on the basis of your priorities.
Below we give a rough overview of each of the main options. These include ‘with profit’ policies, non-profit policies, and unit-linked cover.
The policyholder still receives a fixed lump sum with this type of endowment saving plan.
However if their investment performs well they receive bonuses too.
Investing can be a risky experience though. The risk is that should your investment perform poorly you might lose out.
The details of this are quite simple. The balance you get when the policy ends is fixed.
When you take out a unit-linked plan you have the opportunity to purchase units in investment funds. Then, the income you get depends on the investments and how well they do. In other words, better investments lead to a higher return for you.
The good thing is that you get control of the unit trusts your expenses are invested in.
Essentially, these are designed to generate returns that can then clear remaining debt on your home.
An endowment policy mortgage plan can be taken out alongside an interest-only mortgage. You pay a fixed amount towards your mortgage balance.When your plan ends you get a lump sum as normal.
But, there is no guarantee this amount will cover the mortgage. You will also incur an interest charge on the mortgage balance.
The homeowner will only pay off interest on their mortgage. What you would have spent paying off the mortgage you pay into endowment plans. Before you can agree to this type of policy you will need to have an appointment with a lender.
The premium paid can be monthly or annual. You must give proof and documentation that you can afford the size of the interest and monthly premiums stated in your quote.
If interest rates behave as expected your mortgage is cleared when these types of endowment policy mature! Sometimes people manage to save more than their mortgage amount. In this case they get a bonus lump sum payout!
In some circumstances the minimum savings goal might not be met, for example if conditions mean the investment performs poorly. If your savings don’t meet the remaining property debt then you will have to fund the difference.
seek financial advice from a financial adviser before taking out mortgage endowment policies. This process will determine whether it would be a good service for you.
Check that any financial advice provider or firms you go to are authorised and regulated by the financial conduct authority before you start the advice process.
For some people it is important to choose where their money is invested. If this is the case you will need a unitised form of policy. Then you are given options. Options can be funds the company run. Or they might be open-ended investment companies (OEICs) (run by independent businesses).
Remember, your investments will be determined by the insurance company, not yourself, if you choose a with-profits policy.
With a non-profit plan you get whatever amount you initially agreed. With other types of plans the amount you get will depend on the investment performance.
A with-profit plan gives your previously agreed maturity value plus shares of any bonuses earnt.
The most common reasons people want endowment insurance policies are:
Essentially, they are a flexible alternative to standard life insurance, with fewer restrictions if you want to access what you pay in.
An endowment life insurance policy gives you the chance to benefit from your investments. Typical life insurance policies are designed to pay loved ones and only in the event of your death.
Furthermore, if you are still alive at the end of a typical life insurance policy term, you and your family receive no funds. Whilst, whole life insurance overcomes this it has much larger premiums, and still you personally will not see the money.
So, how does it work? Premiums paid go towards savings plans. Savings are given as a cash lump sum, provided the holder of the policy is alive when maturity is reached.
Should you not make it to the end of the policy term, payment goes to your chosen beneficiary.
The other difference is that you/ your loved ones might be given a bonus. Remember, this depends on the type of endowment you originally chose.
Until 1984 customers were entitled to tax relief on premiums if they had endowment policies . Officially, this was called ‘Life Assurance Premium Relief’. Sadly, this is not still available.
There are, however, still a range of advantages that come with buying endowment policies.
Firstly, they can help you save finances. This can be helpful in the future. People use these savings for a variety of things, for example supplementing a pension in retirement or paying off a mortgage.
Secondly, your policy document will include life cover. Essentially, this offers your family financial support (from your investment) if you happen to die within the policy term.
Thirdly, you could receive a bonus. Certain policies are designed to pay extra if investors are successful with investments.
Taking out a policy might seem simple enough, and for some it is straightforward. But, finding the top life assurance and endowment provider is a lot of work. What is more, there are some gimmicks and scams out there that you need to be careful of.
This is why you should make sure you discuss options with an expert. They can assist you with finding the top provider and ensure your policy has the features you need.
If you are going to be making your own investments, financial advisers can be invaluable. This is because if you make a poor decision you might not meet your target amount.
You can access the maturity value when your plan comes to an end.
Maturity value is whatever amount you have successfully accrued during your policy.Remember, for a non-profit plan this is set at the policy onset. For other plans, it will depend on how well your investments did.
Maturity time is normally ten, fifteen, or twenty years. This is something you can choose, but often there is an age limit.
In the event of critical illness some policies might still payout, so check your terms.
You have two options if you wish to cease paying your life insurance endowment:
The fact is, you tend to get higher amounts for traded endowment policies than surrendered ones. So, for many, selling endowment policies to a third party company is a wiser choice than asking their endowment provider to end their plan early.
From the minute you sell the life insurance endowment it is owned by the buyer. The buyer then becomes responsible for premiums. They receive maturity value when the endowment life insurance ends, and any investment bonuses.
The surrender value is simply what you will get if you decide that surrendering your policy is a good idea.
If reversionary bonuses are added during your policy (if investments do well) they cannot be taken off. So, your bonuses cannot simply be removed in response to you cancelling your plan.
However, the lending team may have the right to limit part or all of the bonuses you earnt. This is because they apply a Market Value Adjustment (MVA). The MVA accounts for how well the investment vehicle performs.
The adjustment is normally a Market Value Reductiona (MVR). It is not fixed. Instead, it will vary from member to member depending on the market data your company has.
If they are entitled to reduce your bonuses, they will deduct the amount from the surrender value.
Before selling endowments, think about why you need the money.
Some people choose to sell their endowments if the growth rate is poor. This means they have not been able to save the amount they wanted to. But if growth rates might improve selling might not be wise.
Other times, people find themselves in difficult circumstances. These can mean they need to urgently spend the amount they have saved so far and stop paying premiums.
For example, people sell their endowments to clear a mortgage, switch their investments to stocks, pay off large debts, and in some cases simply to gift it to somebody else. But,remember, you might lose out financially if you sell.
It is important to make careful comparisons between the potential buyers of your policy. It can be a good idea to seek guidance before choosing a buyer of your endowment life insurance.
Buyers rarely give financial advice.This is why independent advice should be sought before selling your endowments.
Normally providers send an annual statement. This statement gives a summary of policy value and the performance of any investments.
So, this allows you to keep track of your savings annually.
If you want to know the value mid-year, contact your provider to find out. When you call up the office, be sure to have your policy number.
Sometimes people find they cannot afford their policy payments. They might want to sell, in order to get rid of this consumer credit.
However, other options are out there and might be better. Sometimes, lenders let you keep the policy but stop making payments towards it.
This is good if you simply can’t afford the premiums but do not need the savings yet. This is because no savings are paid into your bank until the policy ends.
If you go for this option, check the terms carefully. This is because life policies can sometimes become void when you stop paying premiums.
The other option you have is to surrender. The endowment life insurance provider gives a lump sum as soon as the surrender is complete. No more premiums will need to be paid, either.
However, this often involves charges and penalties. One of the fees you may encounter is a surrender fee. Check the exact amount of this before cancelling.
Some people have large savings goals or debts to pay off in the future. One example people often give is wanting to pay off their mortgage.
An endowment policy can be a good investment in helping someone achieve these goals, whilst at the same time giving life insurance cover.
As some of the types of policies involve investments, they can be attractive to people that do not mind taking a risk. This is because the exact total they will receive at the end depends on the performance of the investment. It could go up, giving you a bonus. But, it could also go down.
Online guides can help you choose a provider, and there are a number out there. Even if you consult these, you should discuss the plan and your options with an independent adviser.
Most people buy their policy directly from a life assurance company. Three examples of popular providers for endowment policies (UK) are Aviva, Canada Life and LVE.
Have a free consultation to discuss your circumstances and see what options you have:
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An endowment plan is a type of life insurance policy but one that doubles up as an investment fund. Read more about how they worka and if they are suitable for you below.
Rob writes and edits the content produced by the rest of the team. He has a degree in History from Leeds University and has producing, reviewing and editing the site since 2016
