Looking for your next long-term investment? Endowment policies can be a good option for many, especially if you are interested in the addition of life insurance.
Purchasing an endowment policy can be confusing and it’s important to fully understand the risks involved with investments. So, is an endowment policy really right for you? Read our guide for everything you need to know about endowment policies.
An endowment policy is a long term investment product that also includes a life insurance policy. You pay in a set monthly amount for a set term and get a cash lump sum at the end of the policy.
What makes this policy different is that part of your monthly payments goes towards a life insurance policy. This means that if you die before the endowment policy ends, then the insurance company will pay out to your chosen beneficiary.
People mainly get endowment policies to enjoy the set lump sum after it ends to spend however they like. Others might use the lump sum when the policy ends to pay off their mortgage.
Essentially, endowment policies give you extra peace of mind with life insurance and give you the chance to profit off a large lump sum with investments.
Taking out an endowment policy will see you paying a set monthly payment for an agreed number of years, usually for around 10 to 25 years. Part of your monthly payments will be used to buy life insurance. How much life insurance you get will very much depend on your age, medical history and lifestyle choices.
The rest of your monthly payments will be invested in certain assets. The size of the lump sum at the end of your endowment policy very much depends on how well those investments perform.
If you pass away during the term of your endowment policy, then your family will receive a payout from the insurance provider.
Endowment policies offer both life insurance and a lump sum at the end of the policy from investments. So, if you die during your policy your family will receive a payout. However, if you don’t pass away, you will still receive a lump sum at the end of the policy from your investments.
This means that endowment policies do tend to cost more than standard life insurance as a payout is guaranteed whether it’s from life insurance or your investments.
Endowment policies will see your money either invested in a with-profits basis or unit-linked basis.
If you were to choose a with-profits policy, the savings that you pay in monthly will be invested by the insurance company.
If you were to choose a unit-linked endowment policy, you will have the ability to decide how you want to invest your money.
There are several different types of endowment policies depending on what you are looking for. With all of them, you will get life insurance alongside the policy but the length may differ. Always discuss with your insurance provider which plan suits your situation best.
A non-profit endowment policy pays out a specific lump sum when it reaches the end of its term. The premiums will, therefore, be lower than other endowment policies that allow you to make extra profits off investments.
Non-profit endowment policies will work for those who are looking to pay off a specific thing at the end of the policy, like a mortgage, for example.
With-profit endowment policies are designed to pay out an agreed lump sum at the end of the policy plus an extra amount if the investments made a profit.
This means that the lump sum you’ll get at the end of the policy isn’t guaranteed. If the investments perform well, it’ll be higher than expected but if they do badly, it could be less than you hoped for.
Unit-linked endowment policies give you more power and control over your investments. You are allowed to use your monthly premiums to make your own investments.
Similarly to with-profit policies, your final lump sum will very much depend on how well your investments performed.
Whole of life endowment policies include life insurance that will last until the day you die, not just the length of the policy term.
This means that your family will be paid a lump sum if you pass away at any point, even if your endowment plan has ended, the life insurance still stands.
It can be hard to provide even a rough figure on how much your endowment policy will cost. This is because so many various factors affect the price of the premiums. For example, how much life insurance you need, your age, medical history, how much you want your investment lump sum to be and which type of policy you choose.
However, there are various charges that you should be aware of when working out the cost of your endowment.
Administration fees on monthly premium payments
If you choose a with-profits policy, fees can be deducted from your bonus returns, read your ‘key facts’ provided to understand what these may be
If you choose a unit-linked policy, charges will be deducted from your different investments
If you wish to end your policy early, there will be exit charges
If you feel like a standard life insurance policy is too limiting, then an endowment policy might be a better option for you. Endowment policies can offer a flexible approach to life insurance, acting both as long-term life insurance and an investment that will pay out. This means that your loved ones are covered in the event of your death, and if you don’t die, you will still receive a lump sum at the end of the policy.
If the following applies to you, then an endowment policy might be worth considering:
You want to save a lump sum of money for a particular goal, event or retirement over the next 10 to 25 years
You want a low-risk investment tool that will pay out at the end of the policy, as long as you pay your premiums
You are happy for the value of your investment to go up or down and understand that you might get less than you invested
You want both life insurance and an investment in one package
Whether you should get an endowment policy really depends on your circumstances. If you feel like you only need a lump sum for your dependants if you were to pass away, then this policy might not be right for you. This is because endowment policies are more expensive than life insurance.
However, if you want to pay off your mortgage, have some extra money for retirement or have a big event coming up, then an endowment policy could work for you. Your family has peace of mind that they will be financially safe if you pass away but also you can benefit from a lump sum if you are alive at the end of the policy.
If you decide that an endowment policy is for you, you can usually buy one from a financial advisor or an insurance company.
Always make sure that you get a ‘Key Features’ document from the provider before purchasing an endowment policy. This will outline the advantages and disadvantages of the policy and will help you to make an informed decision.
Endowment policies are not suited to everyone so make sure you receive some financial advice before going ahead and purchasing one.
Endowment policies are no longer usually sold alongside mortgages due to the issue of these policies being mis-sold. Many people were not informed of the risks and so their payouts were much lower than expected, meaning their full mortgage balance wasn’t covered.
Endowment policies are much better suited to be sold alongside life insurance as long as the investment risks are fully understood.
When endowment mortgage policies were popular, many people felt as though they were mis-sold the policy as it was not suitable for their needs or circumstances.
If you believe you were mis-sold an endowment mortgage policy, you have to make sure that the advice you received was incorrect or misleading. You cannot complain just because the investments did not perform as well as you hoped.
The following are grounds for complaint:
It wasn’t explained that you might have less money at the end of your mortgage term due to bad investments
You were told that an endowment policy could definitely pay off your mortgage
The fees and charges were not fully explained
An assessment of your financial circumstances wasn’t carried out before taking out the policy
There could also be other circumstances that would allow you to make a complaint against your endowment policy. Always seek professional advice before taking any action.
You have a few different options if you currently have an endowment policy that you are looking to end. We explain these options below:
Wait until maturity - if you continue to pay your premiums monthly until your policy matures, then you will receive your lump sum at the end of the term
Stop paying your premiums - some providers might let you keep your endowment until maturity but without paying any more monthly premiums. Bear in mind this would mean your payout upon death or at the end of the policy will decrease
Surrender the endowment - you may have the option to cancel your policy before it ends and receive a payout from your provider. This payout will be significantly less than it would be if you allowed the policy to reach maturity
Sell your endowment - you could sell your policy to someone else and receive a lump sum. This lump sum could be more than your provider would give you if you were to surrender it
Once your endowment policy matures and you receive a lump sum, you might be wondering whether the taxman will want his share. However, most endowment policies are paid out tax-free providing they meet the ‘qualifying policy’ rules.
If you are in doubt about whether you have met the ‘qualifying policy’ rules, then make sure to seek confirmation from your policy provider.