The 2 most common types of investments within Endowment Policies are:
- With Profits - you share in the insurance provider's profits. Annual bonuses are allocated to your policy related to the profits made by your provider. As the provider's profit is not assured, the bonus cannot be guaranteed. However, providers typically allocate bonuses to smooth out fluctuations in profit performance over a period. The return on the investment premium depends on the bonuses allocated over the term of the policy.
- Unit-Linked - insurance providers offer a range of investment funds into which the premium "units" are invested. You can select the funds but there is no guarantee on performance and their value can fall as well as rise. The return on the investment premium depends on the performance of the investment funds.
Endowment Policies are usually available in 2 forms:
- Regular Savings Policies (sometimes known as "low cost endowments") are most commonly seen as regular savings plans attached to mortgages. With the low cost endowment mortgage, you pay the mortgage provider interest on the mortgage and a regular amount to the insurance provider. This amount is invested in the insurance provider's With Profits or Unit-Linked funds. If you die within the term, the guaranteed minimum death benefit repays your mortgage. However, at maturity the sum paid out depends on the performance of the With Profits or Unit-Linked funds. There may be sufficient funds to repay your mortgage with perhaps some "profit" returned to you but, if the performance has been below expectation, you may have to top-up the amount received from the endowment to repay the mortgage. You should review the funds' performance annually to take early action if performance is below par.
- Bonds or Single Premium Policies are savings plans with typically a small element of life insurance. The premium is usually a single lump sum, used to purchase the life cover but mainly invested to provide a policy with investment returns. You can choose to receive an income over the term ("Income Bond") or re-invest for growth ("Growth Bond") or partly both. At maturity, you receive a return of capital which, depending on investment performance, may be greater or lesser than the original sum invested. There are variations that offer guaranteed levels of income and / or capital at maturity.
Plus Points: Endowment Policies offer a convenient and disciplined means to save while having some element of life protection cover. The regular payments make administration simple.
Points to Watch: With "bundled products" it is more difficult to assess if the products meet your needs as your circumstances or conditions change. For example, as outlined above with an Endowment mortgage you should have regular reviews to make sure the investment returns are not below par.
Premiums can be expensive and can vary greatly between providers. Obtain several quotes and compare terms. Review the providers' bonus records (for With Profits policies) and the performance of their investment funds after deductions for charges (for Unit-Linked). If you cancel your policy there is no assurance that you will receive all your funds back, especially in the early years.
For peace of mind, choose providers with consistent bonus and investment track records over time and a sound market reputation.
Tip: Endowment Policies contain life insurance within a savings vehicle. Unless you have specific reasons to combine them, you can purchase life insurance and separately invest your savings in investment products provided by specialist investment providers, including insurance providers. This may afford you a greater degree of flexibility to select products to suit your circumstances as they change.
General
Term
Whole Life
Endowment
Insurance Linked Savings
