Endowments Guide | Endowments Help Product Information

TheMoveChannel.com | Endowment policies

Endowments are unusual products that combine a savings vehicle with an element of life assurance. Their most common use is as an investment product to accompany an interest only mortgage, though a good number of people still hold endowments that are unassociated with any mortgage.

When an endowment is held in conjunction with an interest only mortgage, you normally pay money into the endowment whilst simultaneously servicing the outstanding interest on the debt.

The money you pay into the endowment is invested by the life office that is managing the fund, with investments widely spread across all sectors of the stock exchange, with real assets such as equities and property usually representing around 70% of the total fund value.

Some of the monthly premium is also used to pay for a life assurance policy with a sum assured equal to the value of the mortgage loan. This is designed to ensure that the full amount of the loan is repaid if you don't survive to the end of the repayment term. Life assurance is an integral part of the endowment product, not an optional extra and you cannot have an endowment without the life assurance element. The life assurance element of your monthly payment is usually only quite small, with the bulk of your repayment providing funds for the life company to invest for the term of the contract.

There are various different types of endowment each with slightly different workings and methods of growth. A few other generic points relating to endowments are:

  • With most endowment policies, the length of the repayment term is fixed and cannot usually be altered. They are portable, so you can take the endowment with you if you move to a new home, though you may need to top up the payments if you add additional borrowing to your mortgage. You are not usually required to show any further evidence of health to increase the cover on the life assurance element of the endowment.
  • Another useful facility, that can generally be arranged as part of any endowment, is a waiver of premium. This is the option to have your premiums paid by the life office in the event that you cannot work because of illness or accident. It works very much like an income protection policy. This does not come as standard with an endowment and costs extra.
  • There are higher set up costs, charges, administration costs and commission payments in the early years than there are with repayment mortgages. This is known as front end loading. These costs are hidden within the monthly premiums. Before selecting an endowment, you should always find out what the charges are and check the past performance of the fund, bearing in mind that this will not necessarily be any accurate guide to future investment performance.