Endowment Policies - How to Save with Life Insurance
What is an Endowment Life Assurance Policy?
An endowment policy combines life insurance with a savings policy. It gives all the benefits of a term-based life insurance policy, plus is designed to pay a cash lump sum upon maturity – giving you something to look forward to once the term is over.
Traditionally, endowment policies were most often used to cover interest-only mortgages – providing a savings and life insurance combination which ensured the mortgage would be paid, either in the event of death or when the mortgage term was up.
With the decline of interest-only mortgages over the last decade, endowment policies have also seen a drop in popularity, but they still exist as useful and effective life insurance cover with a sizeable bonus.
What is Term Life Insurance?
Fixed term and level term life insurance policies both detail life cover which is set for a certain length of time (the ‘term’ in the name). The idea is that if you die during the term, your policy will be paid out, but after the term has ended, the policy ceases to exist.
They are perfect for covering your working life – during which time expenses tend to be higher, with mortgage payments and family commitments. Often, a term life insurance policy will cover you to your retirement age, or when your family are all grown and flown from the nest.
For more information on term life insurance, read our articles on the subject or give one of our experts a call!
A Life Insurance Retirement Plan
With life insurance typically set to cover you through your working life, the beauty of an endowment policy can be the benefits it offers for you to enjoy your retirement.
A standard term life insurance policy simply blinks out once the time is done. That shouldn’t be seen as a loss – after all, it is there to cover your outgoings in the event of your death, and if a correctly set-up policy ends, you should no longer have those major outgoings and you are still alive – definitely causes for celebration!
However, wouldn’t it be nice if you got something out of it?
An endowment policy provides that. Once the life insurance cover comes to an end, and you step out of the daily rat race, the endowment policy pays out your savings and you have a substantial lump sum to do with as you wish.
That round-the-world trip you were looking forward to? Paid for.
The fun car you always promised yourself? Affordable.
Redesigning and landscaping the garden to provide years of beauty? In the bank.
It’s not just savings, however. During the time you have been paying your life insurance, your money has been used for investment and your return is based on that. It’s what makes endowment a step above a standard savings account.
With-Profits and Unit-Linked
Most endowment policies are ‘with-profits’ policies, but what does this actually mean?
What is a With-Profits Endowment Policy?
The money invested in your with-profits endowment policy is pooled together with the other investors. It is then typically used to invest in a mix of different asset types:
This type of investment does mean that the value of your investment can go down as well as up and can result in it being valued at less than the total invested once matured.
As the endowment policy is a mid- to long-term investment, it is protected from many of the market changes that can negatively impact short-term investments. In this way, it’s a safer way to invest your money than some of the shorter-term options available.
Of course, the financial institution working with your money is working with all their experience and knowledge to invest your money in the best way to produce a good return.
With-profits investments are also subject to bonuses which can be added to the value of the investment annually. These bonuses are based on the company’s profits due to your investment and can add considerable value to your policy.
Bonuses, of course, cannot be guaranteed and should be considered a pleasant surprising extra, rather than relied upon.
With a with-profits life insurance endowment policy, you will receive certain guarantees. For example, there is a guarantee that you will be paid out upon your death, and also a guarantee of payment should the policy mature and no payments have been missed.
Check the specific terms of your policy and speak to our advisors to understand the guarantees available.
Be aware that there are likely to be administrative charges with your endowment policy. These can come as small fixed fees tied to your regular monthly payments, or in a wider way with costs and charges calculated and deducted before any bonuses can be applied to your with-profits account.
Though it is possible to cancel your policy early, there will be charges associated with a premature exit as well.
These charges are not hidden and should be declared before you take out the policy, but always ask and make sure you are aware of all fees before you go forward with the arrangement.
A unit-linked policy provides a more control over the direction your money is used to you, the investor. That level of control does, however, mean that there is a higher risk in a unit-linked policy than the more usual with-profits version.
Simply put, unit-linked policies are better suited to those with more experience and willingness to take greater risks with their money.
Do speak to one of our advisors if you are interested in a unit-linked policy.
Access to Your Savings
As a mid- to long-term investment, an endowment policy provides less access to your savings than many of the other savings schemes available. [[** Liv: link to the recent savings article we did **]]
Endowment policies should be seen as locking your money away until the end of the term. Of course, you can choose the term – not all policies need to stretch to your retirement. If you prefer, you can set up a life assurance endowment policy as a 10 year savings plan with added life insurance, for example. This would give you peace of mind for a decade as well as making the funds available considerably earlier than a similar policy the length of a mortgage.
Getting Out Early
If something changes in your life which means you need your funds early, it is possible to close off your endowment policy and exit before the term. It is not advised, but circumstances can change and force the issue.
There will be fees associated with closing the account early. Discuss the effects of doing so with one of our advisors to understand more.
Here at Compare UK Quotes, we have expert advisors on hand to discuss every aspect of your endowment policy with you. For more information, fill in our contact form and one of our specialists will contact you at a convenient time.