Endowments Guide | Endowments Help Product Information

TheMoveChannel.com | Unit Linked

Unit-linked endowment policies were specifically designed for use with mortgage repayment and are being offered by life offices more and more. They differ quite substantially from with-profit endowments in the way they work:

  • As with other interest only mortgages, you still make interest payments on the full value of the loan until the end of the term.
  • However, the bulk of your premium is used to buy units in a managed fund at the prevailing market price. The number of units you hold increases over time as more and more premiums are paid. The value of these units can fluctuate in line with the investment performance of the fund.
  • There is no guaranteed annual growth rate caused by the additional of annual reversionary bonuses. In a year of poor investment performance, the value of your endowment may drop considerably. Equally, in a successful year, the value of your unit holding may rise dramatically. This means that a unit-linked policy has both the potential for greater, faster growth than a with-profit endowment and a greater risk of failure to meet investment objectives.
  • Life offices differ in the percentage of your premium that is used to buy units. Whatever percentage is used, it will take a few years for your premiums to start buying any significant volumes of units - charges and commission payments eat up much of the premium in the first few years. Once you have built up a significant volume of units, you will start to receive an annual unit allocation statement showing your holding of units and their current bid price, or how much you can sell them for. This means that it is possible to gauge exactly how much the policy is worth at any point in time.
  • Not all the premium goes towards investing and units. Some of the units are cashed in to buy life cover. As with other endowments, the life assurance element is there to ensure that the full loan can be repaid if you die. With this type of endowment, however, the level of cover required fluctuates depending on the value of the units. The amount of cover required is the guaranteed death sum assured (amount needed to repay the loan) minus the current surrender value of the policy. As the policy value rises, the amount of life cover (and therefore the amount of your premium needed to purchase it) decreases.
  • The investment performance of the fund is reviewed at set intervals and the level of your payments can be altered accordingly. Unlike other types of endowment, a unit-linked policy can allow you to pay off the loan early. Since there are no bonuses to be added during the course of the term or at the maturity date, the encashment value of your units at any point in time is the value of your policy. If this reaches the value of your loan, you can cash it in and repay the loan.