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.

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