Money Expert > Life Insurance > Endowment Policies
Endowment Policies
Endowment policies are essentially a form of life insurance, but part of your premiums are used towards investments.
Last updated: 15/01/2025 | Estimated Reading Time: 7 minutes
Money Expert > Life Insurance > Endowment Policies
Endowment policies are essentially a form of life insurance, but part of your premiums are used towards investments.
Last updated: 15/01/2025 | Estimated Reading Time: 7 minutes
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 a type of life insurance policy that provides a lump-sum payout upon maturity or in the event of the policyholder's death. This payout can be used for a variety of purposes, such as funding a child's education, planning for retirement, or fulfilling other financial goals. The dual purpose of offering both protection and savings makes endowment life assurance policies a valuable financial tool for many individuals.
Endowment policies are characterised by several unique features. One significant aspect is the guaranteed lump sum amount, which ensures that the policyholder or their beneficiaries receive a predetermined amount. Additionally, many policies offer bonuses that are declared by insurers over the policy term.
These bonuses enhance the overall returns and make the policy more attractive. Premiums can be paid in various ways, such as regularly, over a limited period, or as a single payment, providing flexibility to suit different financial situations. Another noteworthy feature is the tax benefits, which often apply to both the premiums paid and the payouts received.
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 over set period. 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 money in the form of bonuses.
Non Profit Endowment Policies
These policies 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 without profits.
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 fund 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.
Endowment policies provide financial security by offering life cover, ensuring that the policyholder's family is protected in case of an untimely demise. They also encourage a disciplined savings habit, as the regular premium payments help build a substantial corpus over time. The maturity benefits can be used to meet long-term financial goals, such as funding education, weddings, or retirement. Additionally, many endowment policies come with tax advantages, making them a tax-efficient way to save and invest.
Endowment policies work by requiring policyholders to pay premiums at regular intervals or as a single payment. These premiums contribute towards the life insurance cover as well as the savings component of the policy. Over the policy term, bonuses may be added to the guaranteed sum assured, enhancing the overall payout. At the end of the policy term, the maturity benefit is paid out, which includes the sum assured and any accrued bonuses. In the unfortunate event of the policyholder's death during the policy term, the sum assured along with bonuses is paid to the beneficiaries.
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, the sum of 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 policy ends at the end of the term.
Cancel your endowment – You can cancel your policy before its maturation date, 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 pay you 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.
Penalties: Check for surrender charges or fees associated with early payment or termination.
Tax Implications: Exiting could result in tax liabilities, depending on the policy type and payout.
Alternatives: Evaluate whether adjusting premiums or making the policy "paid-up" would better suit your future financial goals.
Market Value: If selling, compare offers from multiple buyers to get the best price.
Review Your Policy Terms: Understand surrender values, fees, and the impact on benefits.
Contact Your Provider: Request a cash surrender value or details about making the policy paid-up.
Explore the Secondary Market: If applicable, get quotes from investment companies that buy endowment policies.
Consult a Financial Advisor: They can help you weigh the options and choose the best course of action for your situation.
Each option has its trade-offs, so carefully assess your financial needs and future plans before making a decision. While endowment policies were once popular for paying off interest-only mortgages, their appeal has declined due to lower returns and alternative savings account options. Careful evaluation of the costs, benefits, and risks is essential before committing to or exiting such a policy.
Endowment policies have several advantages, including guaranteed returns that provide financial certainty and the dual benefit of insurance and savings. They encourage disciplined financial planning and can help achieve long-term goals. However, these policies also have some drawbacks. The returns may be lower compared to market-linked instruments, and the premiums are higher than those of pure term insurance. Additionally, surrendering the policy before the maturity date can result in financial loss, making it important to commit to the policy term.
To make the most of your endowment policy, ensure that you pay premiums on time to avoid lapses. Regularly review your policy to ensure it aligns with your changing financial goals and circumstances. Avoid surrendering the policy prematurely, as this can lead to a loss of benefits. Take the time to understand the policy's terms and conditions, including exclusions and charges, to avoid surprises. By managing your policy effectively, you can maximise its benefits and achieve your financial objectives.
Endowment policies offer dual benefits: guaranteed financial protection for beneficiaries in the event of the policyholder’s death and disciplined savings for long-term goals. However, they come with higher costs than pure life insurance, and investment returns can be uncertain, especially for market-linked plans.
A life insurance policy is often a better choice than an endowment policy for individuals seeking affordable and straightforward financial protection. Life insurance focuses solely on providing a death benefit to beneficiaries, ensuring their financial security in case of the policyholder's untimely demise.
This makes life insurance more cost-effective, as premiums are significantly lower compared to endowment policies, which combine insurance with savings or investment components. Additionally, life insurance offers higher coverage amounts for the same premium, making it ideal for those who want maximum protection for their dependents. Unlike endowment policies, life insurance avoids the complexity and risks associated with investments, providing peace of mind without tying up funds in long-term savings plans that may offer limited returns. For those prioritising financial security and flexibility, life insurance is a more focused and efficient solution.