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What are Endowments?

Endowments are regular premium policies offered by life assurance companies. They combine investments with life cover and have fixed term. Sometimes used to repay interest-only mortgages, they generally require you to pay a fixed premium on a regular basis.

A portion of the premium is used to buy life cover and the rest is invested. The level of life cover depends on the premium you pay, your sex, age and length of the policy.

There are various types of Endowments:

  • Savings Endowments

These can be held for general investment or other savings goals and need not be linked to a mortgage.

  • Friendly society Savings Plans

This is a type of savings plan which has certain tax benefits. Friendly societies are mutual associations which have no shareholders. Each month, you can save up to 25 into a fund, or 270 each year.

  • Mortgage Endowments

Mortgage have lost popularity over recent times, but were once common to pay off interest-only mortgages. The policy would offer life cover to repay the mortgage if you were to die during the term.

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How is money invested?

You can choose from a range of funds which you can invest in such as property, cash, shares and so on. There are also maximum investment plans which offer a wide range of funds. Lots of life assurance companies and friendly societies also offer a with-profits fund. These plans offer a minimum value at maturity if you keep paying the premiums. They might even add a bonus to this.

By choosing a range of funds you can help to diversify your investments (in other words, you are not putting "all your eggs in one basket") and thereby spread risks. That way, if one fund fails, you can reduce the loss as you will have others still bringing returns.

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What is a with-profits Policy?

A with-profits policy grows through adding bonuses and often includes some life cover. It is a long-term investment. Most people who take this policy get a lump-sum payment at a specified date in the future. Aside from with endowments, you can also get a with-profits policy with a pension, bond or annuity.

Money is pooled into a with-profits fund from all with-profits policyholders. Then the insurance company uses the money to invest in a wide range of assets shares, property, gilts, corporate bonds and cash deposits. The amount which is invested in each area depends on the insurance company.

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How are Bonuses added?

The bonus to your with-profits policy is added by your insurer. They come from profits which the fund makes from investments. There are two types of bonus annual and final.

The annual bonus is added by your insurance company and they decide how much it will add to your policy. They are not obligated to add a bonus each year but once a bonus is added, it may not be taken away (subject to your meeting the terms and conditions). Your annual bonus is not safe if you decide to cash in your policy early.

The final bonus is used to top up the value of your policy and is calculated when it reaches maturity. If you choose to cash in your policy early you might still receive a final bonus (though it is likely to be lower than if you keep the policy to maturity).

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How much money you will get back?

Most policies pay out a guaranteed amount at the end of the policy. This guarantee will be subject to the conditions set out in your policy documents, for example you may have to continue to pay all your premiums. The payout might be in one lump sum, or a series of payments. The insurer may also add bonuses to your policy each year. This increases the amount of money you are guaranteed to get back at the end.

Bonuses are not guaranteed, especially if the investment returns are low or if there is a large-scale market decline.

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How are Endowments Taxed?

Tax on endowments depends on your tax bracket. Higher-rate payers may have to pay income tax on their policy when it reaches maturity. If you decide to cash your policy early you might have to pay tax on capital growth.

However if you hold your policy for at least 10 years and is held to maturity then you are usually paid the value of the policy as a lump sum without further tax liability.

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What are the Charges and Fees?

It is said that some of the charges on endowment policies are higher when compare to other investments. Make sure you find out exactly what charges are involved before taking a policy, and compare these with other investment plans.

If you decide to cash in your policy before it reaches maturity, you might incur a charge. Therefore it is wise to think if you might need to access your money during the length of the policy if you think you will, then consider another investment plans (such as ISAs).

Your adviser might also take commission on your endowment. This may be higher than on other forms of investment plans, though generally it varies according to the provider.

Tax is also a factor with endowments (see the section on tax, above). Do make sure you fully understand the tax implications of an endowment.

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Is it true some Endowments are Mis-sold?

During the 1980s and 1990s, it is estimated that around 5 million endowment policies were mis-sold. This happened when people were told that the endowment policy they were taking was covering more than the amount loaned to purchase their house. They were also told that if the stock market performed badly, they would still have money available as an investment.

However, it emerged that prospective returns were less than attractive thanks to a change in the valuation of the stock market many people were even unable to pay off their mortgages. As a result, a large number of people took action to claim compensation. They argued that if they had known the full story they would never have taken the policy and that they did not receive proper advice.

Specialist claims companies offered (and still offer) to reclaim mis-sold endowment policies by calculating what a person"s financial situation would be if they had not taken the policy and taken a standard repayment mortgage instead. Successful cases were able to get as much as over 2,000.

Make sure you are fully aware of what your policy covers and how much you stand to benefit before you open an endowment (or any other form of investment plan).

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Closing the Policy Early

Endowments are best kept open until they reach maturity (the end of their term). However, if you want to close your policy before that there are some options. Note that you might incur tax payments for closing early check what these are with your provider.

  • Cashing in

After the assurance company has taken their cut of your policy in charges, you will receive a value called a cash-in or surrender. Note that you might incur charges and penalties for cancelling your policy early.

  • Selling

You might be able to sell your endowment and this may bring you more money than by cashing it in. This is covered in more detail later in this guide (see below).

  • Paid up

You might be able to make your policy paid up. This means that you will only take money out at the original maturity date and you don"t have to pay any more money into it. By doing this, you will not receive as much money at maturity as you would if you continued to pay premiums into it. Your life assurance might be reduced if you make your policy paid up.

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Selling Endowments

There are various reasons why people choose to sell their endowment policies. These might include due to re-mortgaging, wishing to split assets after a divorce, paying for a large expense such as DIY or a wedding, or generally restructuring personal finances.

Before you go ahead and sell your policy, make sure you go over all of your options. In addition, make sure you find out what if any charges are involved.

Selling your policy could release more cash than by simply surrendering it. There is a good market for traded endowment policies and there are many companies who offer to help people sell them. You can have yours valued and receive a cash offer from a specialist company on behalf of investors. The investors will keep up the monthly subscriptions and keep the policy going until it matures.

Many life assurance companies work together with specialist buying companies and they must make sure you are fully aware of the alternatives to merely surrendering your policy.

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What does Surrendering mean?

If you surrender your endowment policy, you are cashing it in before it reaches maturity. By surrendering your policy back to the life company which sold it to your, you could recover some of the value of your original investment. You might be penalised for doing this however so consider selling it instead.


Please Note: is not authorised to give advice under the Financial Services and Markets Act 2000.

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