Endowments Guide | Endowments Help Product Information

TheMoveChannel.com | Setting The Assumed Policy Growth Rate

Aside from the bonuses that are added to most endowment policies, the policy will grow more or less in line with the increasing value of the investment fund. The rate at which it grows is critical to the eventual cash-in value of your policy. If a little more caution had been excercised by those selling endowment policies over the years, then we would not have had anything like the scandal that has ruined the lives of many policyholders.

With all endowments, the provider will make some assumptions about the growth rate of the investment at the beginning of the policy. There are often a variety of different assumed rates of growth for you to choose from. The rate is used to calculate how much your repayments need to be in order to have enough money to repay the loan at the end of the term. Whether or not your repayments will actually be enough to reach the level of your loan is not usually guaranteed by the product provider.

The higher the growth rate assumed, the cheaper the premium - you are relying more on favourable market conditions and the prudent investment skills of the fund managers than on the amount of money you pay in. However, a higher assumed rate of growth brings a greater risk that the investment objectives will not be reached.

If the assumption is that the growth will be slower, your premiums will be more expensive, as you must contribute more money to compensate for the inferior rate of growth. This brings a greater likelihood that your fund will exceed the performance necessary to repay the loan at the end of the term. If this is the case, then there will be a cash surplus left over, which you can keep - with no tax to pay!

During periods of low interest rates, a greater portion of your fixed monthly repayment is going into your endowment policy, as your payments on the loan amount will be lower. This increases the likelihood of there being a surplus at the end of the mortgage term. This means that endowments can be more attractive when base rates are low.

The corollary of course, is that during periods of high interest rates, a large portion of your monthly repayment is taken up with interest. This may mean that less is being paid into your endowment than is necessary to meet the investment objective.

Some people temporarily stop paying into their endowment if it has substantially exceeded their expectation of growth. If you do stop your payments into the endowment, then your policy value may still increase, as the underlying fund should still be growing. Unfortunately, this will not be nearly as fast as it would be under normal circumstances because:

  • No further regular payments are being added to the fund.
  • Investments grow cumulatively - the more there is, the faster it should grow.
  • Management charges are deducted from the fund, reducing your growth.

Unfortunately, much of the news headlines relating to endowments over the last few years has been dominated by those policies where the assumed growth rate was insufficient to meet the investment objectives, meaning that the fund would not perform well enough to cover the capital lent to for the mortgage.

Most endowments that are used to repay mortgages cannot guarantee that you will not be left with a shortfall, meaning that the eventual size of your fund is dependent on your insurance company's ability to invest your money wisely.