UK Endowments
Introduction to endowments
A lot has been written about endowments over the last couple
of years, much of which stokes up the impression that they
are something to be steered well clear of. Many people do
just that, without really knowing what they are or how they
are used.
This section contains some useful information about endowments
and their use and introduces the concept of selling your endowment
policy as a potentially cost-effective alternative to surrendering
it prematurely.
What are endowments?
Endowments are unusual products that combine a savings element
with life assurance. Their most common use is as an investment
product to accompany an interest only mortgage. With any interest-only
mortgage, you pay interest on the full amount of the capital
for the entire duration of the loan term.
Each month, you would normally pay money into some form of
investment product which will eventually accumulate enough
to pay of the mortgage loan at the end of the term. An endowment
is one such investment product, though it is a little more
complicated than a simple investment fund such as an ISA or
pension. Life office investments are widely spread across
all sectors, with real assets such as equities and property
usually representing around 70% of the total fund value.
The reason for this complication is that some of the monthly
premium is also used to pay for a life assurance policy with
a sum assured equal to the value of the mortgage loan. This
is designed to ensure that the full amount of the loan is
repaid if you don't make it to the end of the repayment term.
Life assurance is an integral part of the endowment product,
not an optional extra and you cannot have an endowment without
the life assurance element. The life assurance element of
your monthly payment is usually only quite small, with the
bulk of your repayment providing funds for the life company
to invest for the term of the contract.
Further complications are added by the fact that there are
various different types of endowment each with slightly different
workings and methods of growth. Follow the links at the top
of the page to read brief summaries of the main ones.
A few other generic points relating to endowments:
- With an endowment policy, the length of the repayment
term is fixed and cannot usually be altered. You can take
the endowment with you if you move to a new home, though
you may need to top up the payments if you add additional
borrowing to your mortgage. You can keep on raising the
amount you pay into it each time you trade up to a more
expensive house. You are not usually required to show any
further evidence of health to increase the cover on the
life assurance element of the endowment.
- Another useful facility, that can generally be arranged
as part of any endowment, is a waiver of premium. This is
the option to have your premiums paid by the life office
in the event that you cannot work because of illness or
accident. It works very much like an income protection policy.
This does not come as standard with an endowment and costs
extra.
- There are higher set up costs, charges, administration
costs and commission payments in the early years than there
are with repayment mortgages. These are hidden within the
monthly premiums. You should always find out what the charges
are and check past performance, not forgetting that this
will not necessarily be any guide to future investment performance.
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