Selling endowment frequently asked questions
What is an endowment policy?
An endowment policy is a regular savings plan that includes life
assurance, and as such makes it a qualifying policy for special tax
treatment by HMRC.
This means that if the policy holder dies
before the policy reaches maturity, the endowment policy life
assurance company pays out the life assurance amount but if the
policy holder survives the maturity value of the endowment is paid
out free of tax deductions
Endowment policies were looked upon (and still are to some extent)
as a way of paying off a mortgage (referred to as an endowment
mortgage) or as a savings plan for a future planned use.
An endowment policy can be "unit linked" or "with profits" or
"unitised with profits" - a cross breed of the two.
A unit linked endowment policy has it's monthly premiums invested in
to units, the value of which can go up or down depending on
investment performance and subsequently so can the value of the
policy itself on any given day.
In a time of "bull markets" with rising share prices and strong economic growth, the
value of the policy increases also, however, in bear markets when the markets
decline so does the value of the endowment policy.
A traditional with-profits endowment policy, however, invests in a
"with profits fund" and has a guarantee that the value of the policy
cannot fall. There is no guarantee though that the endowment policy
value will rise
It also means that spectacular rises and falls in policy value,
which can occur in individual high risk unit linked funds, do not
occur in with profits endowment policies. So given that quite a few
endowment policies were used as repayment vehicles for a mortgage it
is not unexpected that risk averse investors opted for one of theses
types rather than their riskier unit linked.
The regularly timed premiums are
invested in a with-profits life fund in an attempt to achieve a
steady return for the policyholder. Normally a fund declares an
annual reversionary bonus, which cannot be taken away after it has
been added to the individual policyholders plan. In this way, the
guarantee of the minimum policy maturity value builds up year by
year, consisting of the basic sum assured and the total of annual
A terminal bonus is normally added when the policy matures, and this
is one of the elements that makes a with profits endowment policy an
attractive investment for an endowment buyer as they have been quite
substantial in the past. Not so theses days though!
Unfortunately the past performance of the with profits funds has
not been repeated which has left a very large number of with profits
endowment policy holders looking at ways to alter the way they pay
their mortgage. The majority have opted to switch to a capital and
interest mortgage (repayment mortgage) and either keep the endowment
policy as a savings plan in the backgrounds, make it "paid up"
and wait for maturity date and the money that will be forthcoming,
or cash them in.
The other option which is now being more often explored as the
word spreads is to sell their endowments on the traded endowment