Endowment Policy

endowment policy

This page was last updated on 1 July 2022

Endowment Policy In 2022

A drawback of traditional life insurance policies is that you never get to see any of the cash you’ve saved up. Below, we discuss a type of life insurance that both helps you save and lets you access your savings.

Topics that you will find covered on this page

You can listen to an audio recording of this page below.

What is an endowment policy?

An endowment plan is a type of life insurance policy. As well as acting as a life insurance policy, it is also an investment fund.  These policies are designed to pay out in one of two scenarios:

  • When the policyholder dies.
  • When the policy matures/reaches the end of the policy term 

Life insurance with endowment savings, therefore, gives you a savings plan as well as financial protection for your beneficiaries. This makes it more flexible than your typical life insurance plan.

How does it differ from a typical life insurance policy?

Standard life insurance policies can be a bit limiting for some. This is because they only payout in the event of your death, and only your loved ones benefit.

Furthermore, if you do not die within the policy term, you and your family do not receive the funds. Whole life insurance overcomes this but has higher premiums. 

An endowment life insurance policy, on the other hand,  offers you the opportunity to benefit from your investments directly. 

If you die during the policy term, payment is made to your chosen beneficiary. If the holder of the policy is still alive when the plan reaches maturity, they receive a cash lump sum. This is because the premiums paid go towards savings plans.

Depending on the type of endowment you choose, you might also receive a bonus. 

Here is a quick video explaining how they work in practice.

What are the different types of endowments?

There is a range of different types of endowment policy on the market. These include non-profit policies, with profit policies,unit-linked cover, and mortgage endowment policies. 

Policyholders often have questions about which option is best for them. Below we give a rough guide to each, but you should always seek advice from independent advisers. An adviser will consider all options on the basis of your circumstances, and explain all the details. 

What is a non-profit policy?

A non-profit policy simply gives a set balance when the policy ends. In other words, it provides a fixed maturity value. 

What is a with-profits policy?

With this type of endowment saving plan, you still receive a fixed lump sum. However, these endowment plans are designed to pay the agreed amount plus any bonuses made if the investment does well. 

This can bring restrictions though. If, after investing, your shares do not experience growth, your total lump sum might fall. If you are saving for a fixed amount, such as your remaining mortgage balance, this is a risk.  

What is a unit-linked mortgage?

A unit-linked plan allows you to buy units in investment funds. These funds might be owned by your insurance company, or by other investment companies.  Normally, you are in charge of the unit trusts your expenses are invested in. 

The size of the income you get depends on the performance of your investments. For example, if your investments perform well you get a higher return. 

What are endowment mortgages?

An endowment policy mortgage plan is often taken out alongside your interest-only mortgage. With these policies, you pay a fixed amount each month/year. Then, when the plan ends, you receive a lump sum. These returns are designed to pay off the debt on your home. 

How does an endowment mortgage work?

In the UK, this service allows the homeowner to pay off only the interest on their mortgage. Instead of paying the mortgage off, you pay the insurance premium into a savings pot. 

The monthly or annual premium paid goes towards your savings goal, which is the whole of the property mortgage. 

To get a quote for this type of policy you must start by making an appointment with a lender. They will require proof and documentation that you can afford, at a minimum, the interest and monthly premiums. 

After a careful comparison between lending firms, buyers will begin to make regular payments, as set out in the policy document terms. When the policy matures, if interest rates have behaved as expected, your mortgage will be paid off. 

Sometimes, the interest rate follows an unexpected path during the policy. If conditions mean that you have saved over the mortgage amount, you get a bonus lump sum payout!

If, however, you have not managed to save enough with this process, you will need to cover the costs of the difference. 

To avoid a shortage at the end of mortgage endowment policies, seek financial advice from a financial adviser. Ensure your financial advice provider is authorised and regulated by the financial conduct authority

"There is a range of different types of endowment policy on the market. These include non-profit policies, with profit policies,unit-linked cover, and mortgage endowment policies."

What happens when an endowment policy matures?

When the policy matures or comes to an end, you can access the maturity value. This is the amount you have accrued over the duration of the policy. This can vary depending on how well your investment performs. 

The maturity value will either be estimated or guaranteed, depending on your policy terms. Typically, the maturity time will be ten, fifteen, or twenty years. They often have an age limit, and some will give a payout in the event of critical illness.

endowment mortgage

What are the benefits of endowment policy?

There are a variety of advantages that come with buying endowment policies. These include:

  • Helping you save finances for the future. This might be useful for supplementing your pension in retirement, for example.
  • They come with life cover. This will give your family financial support should you die during the policy term.
  • Depending on the features of the policy you choose, you might be able to receive a bonus. This happens if investors are successful when making their investments. 

Up until 1984, customers with endowment policies were entitled to tax relief on their premiums. This was known as Life Assurance Premium Relief but unfortunately is no longer available. 

Can I sell my endowment to a company?

If you want to stop paying for your life insurance endowment, you have two options. You can either cash in the life insurance investment, or sell your endowments to a third party. These third parties are known as traded endowment policy (TEP) companies. 

When you sell your life insurance endowment, the buyer then owns it. They are responsible for paying the premiums, and they receive the amount when the endowment life insurance matures. 

Selling endowment policies to a third party company is normally better than asking your endowment provider to cancel your plan. The fact is, you are likely to get more for traded endowment policies than surrendered ones.

mortgage endowment

Is it a good idea to sell my endowment?

Generally, people choose to sell their endowments for one of two reasons. Firstly, the growth rate might mean they have not saved as much as they expected. Secondly, if their circumstances have changed they might need to spend the amount saved so far. 

Before you choose to sell your endowments, decide what you want to use the money for. Typically, people use the endowments to pay off their mortgage, make investments in stocks, pay off large debts and fees, or even gift it to somebody else. 

If you decide to sell your endowments, you next need to make comparisons between potential buyers. Seek guidance before deciding who to sell your investments too. 

It is important to note that buyers do not usually give financial advice. Therefore, you must seek independent advice on selling your endowments. 

What are the alternatives to selling my endowment policy?

Some people find that when their endowment policies reach maturity age the profits they get are much lower than expected. You can ask your provider what they expect the policy to pay, and decide whether this is enough. 

If you cannot afford the payments anymore, some lenders might let you keep the policy but stop making payments towards it. However, the savings are not paid into your bank until the policy ends. There might also be an impact on life policies too, for example your insurance could be void. 

Another option is to surrender your policy. When you do this, your endowment life insurance provider will give you a lump sum immediately. In most cases this involves charges and penalties, such as a surrender fee.

I already have a policy. How can I find out its value?

Most providers will send you an annual statement, giving a summary of your policy value. This allows you to keep track of your savings, and the performance of any investments. 

To find out the exact value of your policy, you will need to contact your provider. When you call the office, make sure you have your policy number to hand. 

Why might I want an endowment life insurance?

On the one hand, they allow you to save for future costs, such as pensions. Additionally, they come with life insurance, so that your family receives compensation should you die during the policy. Therefore, endowment insurance policies offer a more flexible alternative to standard life insurance.

Should I get an endowment policy?

An endowment policy can be a good investment if you have something large you want to save for. For example, you might want to save up over ten years to pay off your mortgage. Putting a policy in place can help you do this. 

It’s a good option for those that do not mind that the exact total they get back is out of their control, and depends on the performance of the investment. 

How can I take out endowment policies?

Endowment life insurance can be purchased through financial advisers or directly from a life assurance company. 

Taking out a policy and making investments might seem simple enough, but you should always discuss your options with an expert. They can help you find the top provider and save you from any gimmicks that might be out there. 

Who are the best providers?

You can buy your policy from a life assurance company. Examples of providers for endowment policies (UK) include Aviva, Britannia, Canada Life, Legal & General, and LVE. 

There are many online guides to help you choose a provider. Before signing any forms, though, you should talk through your plan and options with an independent adviser. 

Where will my money be invested? 

If you choose a with-profits policy, your investments will be determined by the insurance company. 

If you choose a unitised form of policy then you get to choose how your money is invested. You will get to choose from a range of options. The options might be funds that the company themselves run, or open-ended investment companies (OEICs) that are run by independent companies. 

What is the surrender value?

The surrender value is the amount you get in response to surrendering your policy. The good thing is that once reversionary bonuses are added they cannot be removed. 

However, the lending team might limit part or all of the bonuses you earnt and deduct this from the surrender value. They do this by applying a Market Value Adjustment (MVA). 

This adjustment, normally a Market Value Reduction (MVR), is not fixed but will vary for each member depending on market data at the time. The MVA accounts for how well the investment vehicle performs. 

What is the difference between a low-cost endowment and a full endowment?

Simply put, low-cost endowments are a cheaper form of consumer credit. You get a discount on your premiums, but get a smaller amount at maturity. This is because you make a smaller investment to the life assurance company. 

A full endowment plan involves making a larger investment to the life assurance provider. If you opt for a non-profit plan when the policy matures you receive the earlier agreed target value.

If you have a with-profit plan, you get the agreed maturity value plus any bonuses earnt. Bonuses are accrued if your investment performs well.

endowment plan

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Endowment Policy

An endowment plan is a type of life insurance policy. As well as acting as a life insurance policy, it is also an investment fund. Read more about them here.

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