Life insurance can seem like a tough investment to make, seeing as by nature, the policyholder won't live to see the benefits of the payout.
Endowments are an old-fashioned type of investment, originally created to pay off mortgages. As pay outs from life policies are tax free, the idea was to build investments within the policy for the tax benefit.
This was the only tax-free investment you could make back in the 80s, but since then ISAs have evolved and replaced endowments. As a mortgage repayment vehicle they failed, as the expectations of investment growth in the 80s (high inflation=higher investment returns) did not continue into the late 90s and beyond, making them an unreliable and expensive product.
No one should now be buying an endowment. It ties up your savings and is an expensive form of life insurance. The usual alternative is to have separate life insurance and separate ISA savings.
In This Guide:
What is an endowment policy?
An endowment policy is at its simplest, an investment with life insurance attached to it. This means that the money you pay in premiums is used by your provider to invest in the market, and at the end of the pre-agreed term, you will receive a cash lump sum payout from the policy. These terms are usually between 15 and 25 years.
They are used by people as a way of saving to repay a mortgage, for old age or retirement, but the life insurance aspect gives the security of making sure that their loved ones are covered all under one package.
Who provides endowment policies?
Endowment policies were most commonly obtained from life insurance companies, who specialise in providing such life insurance plans. But don't buy one now without professional financial advice, as generally they are poor value. You should now buy separate life insurance and an alternative savings vehicle like an ISA.
Some friendly societies also offer endowment policies, along with other financial services such as banking and saving funds.
Endowment Life Insurance – How does it work?
In order to offer you cover, the provider uses part of your premiums to put towards your life insurance, whilst investing the rest. This allows the policy to essentially be 2-in-1 – as for the term of the policy it acts as cover towards a named beneficiary.
This means that if you do pass away during the term, the money from the policy will be paid out to whoever you have predetermined that it will be for. Alternatively, if you live to the end of the term, the policy will ‘mature’, and you will receive the cash sum associated with the policy yourself.
What types of endowment policy are there?
There are three main types of endowment policy that you can purchase:
- With Profit Endowment Policies: These agree to pay out a certain amount when the policy matures, but its value will be tied to how well the investments perform. As such, there is the possibility that the value of your policy may decrease if the market collapses, but also the possibility that it may gain value, and you can receive extra in the form of bonuses.
- Non Profit Endowment Policies: These pay out a predetermined amount, agreed between the policyholder and the policy provider, which is unaffected by the value of investments. The premiums are usually less than policies which include profit, but there is less chance of getting good value on your policy.
- Unit Linked Endowment Policies: Unit linked policies allow you to choose how your money is invested, by giving you the choice of what investment funds you wish to purchase into. Most providers allow you to change what you wish to invest in during the term, making it very flexible. It does mean though, that it is highly susceptible to fluctuations in the market, meaning it can gain or lose value over time.
How can I get out of my endowment policy?
If you have an endowment policy, but you are looking for a way out, there are a few ways that you can do this:
- Stop payments – You may be able to keep the value that you have gained on your policy by ending premium payments, which would be paid out when the policy matures. However, the payout is likely to be significantly less than if you continue to pay premiums until the end of the term.
- Cancel your endowment – You can cancel your policy before its maturation, and you will most likely be able to receive a payout instantly for some of the money which you have invested. However, this is likely to be a lot less than the amount you would receive for the policy maturing.
- Selling your endowment – If you are able to find an investor who is willing to purchase your endowment off you, you may be able to receive more money than the payout you would receive from your insurer if you cancelled your policy.
If you want to get out of your endowment policy, contact your policy provider and ask them for 5 things:
- The current cash in (cancellation) value
- If you continue to pay into the plan until its end date (maturity) – how much is the total future contributions you will make?
- And if you make those contributions, what is the estimated end/final maturity value based on a reasonable investment expectation, say 5% a year?
- How much life insurance is included?
- How many years left remaining on the endowment policy?
Then you should a) get a new life insurance quotation to see how much replacement cover will cost and b) consider if the current value (1) + the outstanding payments (2) look good-value against the expected end value (3).