Endowment Policies
An endowment policy is a type of life assurance plan that combines savings with life cover. It is designed to pay out a lump sum after a specific term (e.g., 10, 15, or 25 years) or upon the policyholder’s death, if that occurs sooner.
Investment performance
Endowment policies come in various forms, such as ‘with-profits’ or ‘unit-linked’. While some older policies may have guaranteed the lump sum you would receive at maturity, most modern endowments do not. The final payout usually depends on the investment performance of the underlying fund. For with-profits policies, this amount is built up through the addition of annual and final bonuses, which are not usually guaranteed. For unit-linked policies, the value is directly linked to the performance of the investment units you hold.
‘Qualifying policy’ rules
A key feature of many endowments is their potential tax treatment. Suppose a policy meets certain ‘qualifying policy’ rules (related to the level of premiums and term of the plan). In that case, the lump sum paid out at maturity can be free of any further income tax for the policyholder. It’s important to note, however, that the insurance company pays tax on the income and gains within the fund itself.
Long-term savings objectives
Historically, endowments served specific long-term savings objectives where a guaranteed sum on death was also significant.
Common uses include:
- Repaying an interest-only mortgage.
- Providing a legacy for children or grandchildren.
- Funding future costs like university fees.
- Acting as a disciplined, long-term savings plan.
Important factors to consider
There are several important factors to consider with endowment policies. The charges for managing the policy and the cost of the included life insurance mean it can take several years before the policy’s surrender value exceeds the total premiums paid. Cashing in a policy early often results in a low surrender value, and providers may apply a market value adjustment (MVA), which can further reduce the payout, especially during times of poor investment performance.
Flexible and tax-efficient options
For many individuals, other, more flexible and tax-efficient options might now be more suitable. For example, pairing a separate, cheaper term assurance policy for life cover with a standalone savings or investment plan (such as an Individual Savings Account) can provide greater control and potentially higher returns. If you do not need to ensure that a specific sum is paid upon your death, an endowment is unlikely to be the most suitable choice.
Review existing policies
Like any long-term investment, the final value of an endowment is not guaranteed and depends on investment performance. It is crucial to review existing policies to ensure they still align with your goals and to be aware of risks, including investment risk and the potential for proceeds not to keep pace with inflation.
THE VALUE OF INVESTMENTS AND THE INCOME THEY PRODUCE CAN FALL AS WELL AS RISE. YOU MAY GET BACK LESS THAN YOU INVESTED.
TAX TREATMENT VARIES ACCORDING TO INDIVIDUAL CIRCUMSTANCES AND IS SUBJECT TO CHANGE.
Offshore Collectives
Ready to speak with an adviser?
Request a call back
Gain a clearer understanding of your current circumstances and the options accessible to you by arranging a consultation with an independent financial adviser.
Where we are
HCF Partnership
Ground Floor, 8 Beaumont Gate,
Shenley Hill, Radlett,
Hertfordshire, WD7 7AR