Endowment policies are essentially a form of life insurance, but part of your premiums are used towards investments.
Last updated: 07/09/2023 | Estimated Reading Time: 5 minutes
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.
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.
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.
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.
There are three main types of endowment policy that you can purchase:
If you have an endowment policy, but you are looking for a way out, there are a few ways that you can do this:
If you want to get out of your endowment policy, contact your policy provider and ask them for 5 things:
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).