How does your money with an endowment policy work?

Having known that an endowment policy is a long-term savings plan, usually between 10 and 30 years. Endowments is use for life assurance, such that it can pay back a mortgage when the policy holder dies within the term of the policy, most organization spelt out this as a requirement for providing the mortgage.

Endowments offer an efficient tax savings plan for its holder to enable him/her earns a reasonably big amount of money to achieve certain objectives or goal. In order for the policy to pay out free of all personal taxes a set of Inland Revenue rules need to be adhered to. These state that the amount paid out on death needs to be a minimum of 75% of the premiums paid during the term of the plan endowment policy.

In considering a shortfall of your endowment policy on maturity the shorter the time period the policy is taken, the greater the potential for a shortfall in the final payout at maturity. In most cases, on getting 20 to 30 years endowments in the earlier years should be able pay off a mortgage on maturity. This could be as a result of saved money gained in higher rates of interest in the money market.

What does a Unit-linked endowment investment offers? You can invest in any of the insurance company's range of unit-linked funds. This type of endowment investment plan policies provide no guarantees as to what growth will be achieved.the policy holder has the option of switching or changing funds to benefit from the various investment opportunities that are offered by the different classes of assets,stocks,equities etc as the circumstances changes.

The “with profits” endowment investentcould be seen as the percentage of the amount of growth made by the with-profit fund having accumulated over the years. A statement is given to the holder once in a year specifying the investment situation where a very small or no annual bonus added. The insurance company pays what is known as “reversionary” bonus to the policy holder which is not taken away. They also pay a terminal bonus to the policy holder at the time of maturity, though this is dependent on the terms of the assurance company. When you take out a “with profits” or unit-linked endowment, the insurance company has to give you a written illustration of how much your endowment might be worth at maturity. This is calculated based upon the amount you have paid and will pay in the future multiplied by an annual projected growth rate.

The endowment premiums are basically calculated using the specified growth rates, the age and gender of the life assured(s) (to allow for the cost of the life assurance) and the term of the policy Projections are made based on a 7.5% mid-range growth rate. The projection rates are usually set by the regulators to reflect how the economy is doing and how it is expected to do in the future. Stock market inflation and prevailing interest rates are much lower now than they were in the last two decades, so reducing the projected rates for new and intending endowment policy holders becomes necessary.

The annual average growth of the policy having been lower than 7.5%, which could have been your projected growth rate, may not be worth as it was initially projected. So at maturity the policy may not repay your interest only mortgage. Sometimes it could overshoot this is dependent on many economic variables. In order to help you achieve the projected maturity value of your endowment, the insurance companies assess the situation of your endowment to inform you. They will let you know how much your endowment policy investments have grown over the period sending you projections using conservative assumptions about future growth showing any projected deficit.


With profits endowment

with profits endowment policies are normally enhanced with regular bonus payments. Bonuses are added to the sum assured and once added can be withdrawn at certain times, usually at death or maturity and possibly other times specified in the product terms.

One of the most popular endowment policies sold in the UK is a with-profit endowment. Offered by life assurance companies, with-profit endowments pay the buyer a fixed sum (called the basic sum assured), in addition to earnings from investments made by the company. The basic sum assured plus the investment profits are paid after a predetermined length of time, as long as the policy holder has also been consistent with the monthly payments they agreed upon.

Bonuses may be added annually (known as the reversionary bonus) and at the end of the term (a terminal bonus) depending on investment performance.

There are two options offered for with-profit endowments:

“Low-cost” With-Profit Endowment – does not come with a guarantee for the full value of the loan. Rather, only a portion of the mortgage loan amount is assured of being returned to the policy holder by the end of the policy’s maturity period. This is the less expensive option if you can deal with the higher level of risk. When the endowment matures, profits from the company’s investment are added to the lump sum (through a bonus system) to recover the rest of the loan’s value.

Full With-Profit Endowment – includes a guarantee for the full value of the loan by the end of the maturity period. Usually more costly, it also offers the policy holder the lowest level of risk because whatever happens, they still recover at least the whole amount of the mortgage loan, plus bonuses if the company’s investments turned out to be profitable for the duration of the endowment’s maturity period.

Low start endowment.

Low start endowments are another type of with profits policy where bonuses are added to the endowment sum assured.

First time homeowners find low start endowments attractive because it allows them to match their expenditure with the starting level of their income and then lets it grow in pace with their (ideally) upward financial mobility.

A low start endowment features smaller initial premiums that progressively get higher over time until the endowment matures. Payments are usually at their highest by the last 15 years of the policy.

Flexi endowment.

A policy is written say for a total term, say to the age of 65, with options to encash after 10 years without penalty. The policies are usually written in segments to allow some to be encashed and some to be continued. This may be suitable for school fees planning.

Unit linked endowment policies.

Premiums buy units in a fund of the investor’s choice. Units will be cancelled each month to buy life cover. There is investment flexibility as funds can be switched.

Units will be purchased at the offer price and sold at the bid price (usually lower) incurring a bid offer spread charge of around 5%. Set up costs will be taken off the fund value.

 Non-profit endowment

A non-profit endowment, as the name suggests, has no stock investment component. It is not designed to pay off a mortgage; rather it is bought for the life cover it provides. As such, it is not a very popular choice for endowments as most buyers purchase endowments in order to help them pay off their mortgage loans.

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Some benefits of Endowment policy

Each year the actuaries at the life office review the growth made by their investments and they then apportion the profit to all the policies in force at the time, by way of declaring bonuses which are then permanently attached to the policies. In effect, the owners of the policies are participating in the profits of the life company.

Most people take an endowment policy to cover their dependants during the financially demanding years. They then cash the endowments when they retire since their dependants have established themselves and need no more protection.

They can then use the surrender value plus other bonuses to finance

other things of their own. An Endowment policy gives the holder a return on their premium payments, through an endowment in their own lifetime unlike a whole life insurance which pays the beneficiaries.

An Endowment policy is the best form of insurance for a person with

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