UK Endowments
With-profit endowment policies
A with-profit endowment policy is a contract written by
a life assurance company to pay a fixed sum called the basic
sum assured, plus accumulated profits that are declared annually,
to an assured person on a fixed date in the future (or to
his/her estate if the person dies prematurely), provided that
the premiums have been paid as required by the contract.
There are two types of with-profit endowment. The first
is called a full with-profit endowment. This is the most
expensive type and guarantees to pay at least the value of
your loan on maturity. Much more common is a low cost with-profit
endowment. This also has a guaranteed maturity value, but
it starts as only a fraction of the loan amount and there
is no certainty that it will end up be enough to repay your
loan.
With both types, the accumulated profits are added to the
fund by way of bonuses awarded each year. The size of these
bonuses depends on the performance of the investment fund
- in effect, the owners of the policies are participating
in the profits of the life company. Once added, these bonuses
cannot be taken away. There are three types of bonuses:-
Reversionary bonuses
These bonuses are declared annually as cash values computed
as percentages of the basic sum assured and of bonuses declared
in previous years. Once granted, these bonuses are guaranteed,
cannot be withdrawn and are also known as attaching bonuses.
Special bonuses
These are one-off bonuses, granted at the discretion of
the life company and are also guaranteed. For example, if
a friendly society converts to a public company they may grant
such special bonuses to each policy in force, instead of issuing
free shares in the new company.
Terminal bonuses
Most life companies currently grant an additional bonus
at the end of the life of a policy. In essence this is a loyalty
bonus designed to encourage the policy holders to keep the
policies in force until the maturity date. The size of the
terminal bonus is dependent upon the investment conditions
prevailing at the time of maturity, as well as upon the investment
performance of the life company. Although it can be a large
part of the final sum paid out, it is not guaranteed.
There is also a final bonus that depends partly on the performance
of the fund over the entire term. The terminal bonus may represent
a large portion of payout and is guaranteed to be at least
enough to repay the soan.
- There is a possibility that the bonuses will take the
maturity value above the level required to pay back the
loan. This would result in a tax-free cash surplus, which
you can spend on whatever tickles your fancy.
- The maturity value grows throughout the life of the policy.
The size of the final or terminal bonus makes it rare to
be able to cash in this type of endowment policy early without
losing out. You may end up getting back less than you put
in.
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