Endowment
Policies - Mortgage Information
What
is an Endowment Policy?
Endowments
act as a wrapper for basic investments. They are savings plans in
which payments are made monthly for a minimum of ten years. The
money is invested, usually in stocks and shares, and at the end
of the agreed period the investor receives a lump sum, free from
all taxes.
Endowments
also provide life insurance cover, that will pay out a lump sum
if the investor dies before the agreed term. The amount paid out
on death is usually a minimum of 75% of the premiums paid during
the term of the endowment plan, as this enables the plan to be qualifying
for Inland Revenue purposes and therefore free of taxes when the
policy matures.
Different
types of endowment:
-
With-profit
- Unit-linked
- Low-cost
- With-profit
endowments
With-profit
Endowments
A normal with-profit fund takes premiums from the members of the
fund and invests them in a range of investments. In exchange for
an agreed premium the insurer will guarantee a certain sum of money
on the maturity date of the plan or earlier death of the policyholder.
This is normally described as the sum assured. Each year the actuary
of the insurance company assesses how well the investments have
performed and then declares a reversionary bonus which is then applied
to the sum assured, increasing the guaranteed return at the end
of the endowment plan. Once added, this bonus cannot be taken away.
The attractive feature of with-profits endowments is that the bonuses
act to smooth the ups and downs of the stock market.
Traditional
with-profits funds are becoming less popular, and are being replaced
by "unit-linked" with-profits endowments. A unit-linked
with-profit fund, like a traditional fund, is designed to smooth
out the investment returns from asset-backed investments over a
longer term. Unlike traditional endowments unit-linked with-profit
funds only have a sum assured for death-benefit purposes. Funds
invested buys units within the with-profit fund. When the endowment
provider declares the reversionary bonus it is expressed either
by a rise in the value of the with-profit unit price, or it purchases
additional units where the units are all valued at £1.
Usually
with-profits funds provide a final bonus paid at the maturity of
the plan. This bonus is designed to reflect the capital growth of
the fund during the savings period over and above the bonuses already
added to the fund. Terminal bonuses can represent up to 60% of the
total return on with-profit endowments - this means that savers
who cash in their plans early miss out on the benefit of being in
a with-profits fund. But the saver has no guarantee what the terminal
bonus will be until the maturity proceeds are paid.
Unit-linked
endowments
A unit-linked endowment puts the saver's money into the insurance
company's range of unit-linked funds. When the endowment plan is
first taken out, the saver is given a choice of funds from which
to choose, but nearly everyone chooses either the with-profit or
the managed fund. Managed funds are typically invested 60% into
UK equities, 10% into fixed-interest investments and 30% into overseas
equities.
Part
of the monthly savings premium pays for the life assurance provided
by the endowment plan, and the remainder of the investment (less
charges) is placed into the fund of the investor's choice. At the
end of the savings period the proceeds of the plan are tax-free.
Unlike traditional with-profit endowments, where once bonuses are
declared, they cannot be withdrawn, equity-backed endowments provide
no guarantees as to what benefits will be achieved. Therefore unit-linked
endowments have a higher risk than with-profits endowments.
Low-cost
endowments and endowment mortgages
low-cost
endowments are a combination of a life assurance plan and an endowment
savings plan. They are usually sold as a way to build up a lump
sum to pay off a mortgage, this may also be called a house purchase
endowment.
A saver
who takes out an endowment mortgage pays only the interest on the
mortgage, not the capital sum. The endowment, which ois usually
a 25 year savings plan, is then used to build up capital to repay
the capital sum. If the endowment generates more funds than the
amount of mortgage outstanding, then the investor receives the surplus
tax-free. If the amount is not enough, the investor has to make
up the difference.
Endowments
were very popular in the 80s as a way to pay off a mortgage, but
declined during the 90s as interest rates fell and the endowment
often did not cover the repayment of the mortgage. Life insurance
companies now review the progress of an endowment every five years
and if the amount generated is not on track to repay the mortgage
they will write to the investor to ask them to increase the premium.
Surrendering
an endowment
With relatively high charges in the early years of an endowment,
cashing in the plan early can mean that the saver receives back
little more than the amount paid in, or sometimes even less. Savers
should aim to keep making payments until the end of the specified
term, and collect the valuable terminal bonus. If you do have to
cash in the policy early, contact the insurance company, which will
then provide you with a surrender value. Do not automatically accept
this figure. If the endowment has been running for at least 7 to
8 years, you may be able to achieve a higher surrender value by
offering the policy to a traded endowment policy market maker. Click
here for a list of dealers in second-hand policies.
There
are many different endowment plans offered by providers in the UK,
and their record in building up a cash lump sum varies dramatically.
Ask an independent
financial adviser (IFA) to recommend a policy.
List
of Major Mortgage Lenders
OCIS
provide general financial information, we urge you to consult an
Independent
Financial Adviser ( IFA )
before making any important decisions about your finances. |
