This is perhaps the most popular type of endowment with
mortgage borrowers and it shares many features of a full
with-profit endowment:
Future growth in the value of the investment element
is assumed to be at a certain rate and this rate is used
to determine your necessary repayments.
Your premiums are pooled with those of other investors
and paid into a fund managed by the life company.
Annual bonuses are paid which cannot be taken away (hence
it still being called a with-profit endowment)
A terminal bonus is paid that may represent a large portion
of the final payout.
There is a possibility of cash surplus at the end of
the term.
It has built in life assurance to cover the value of
the loan.
There are some key differences though:
A full with-profit endowment guarantees that the maturity
value and death benefit will be sufficient to repay the
loan. However, although low-cost with profit endowments
also have a guaranteed death benefit and guaranteed maturity
value, these start as only a portion of the loan amount,
offering no certainty that the investment will ever be sufficient
to repay the loan. This lack of guarantee means your monthly
premiums are lower than they would be for full with-profits
endowment.
The policy value will rise during the course of the term
as the annual (also known as reversionary) bonuses are added
to the guaranteed maturity value each year, though there
is no guarantee that this will be enough to pay off the
full loan.
The terminal bonus is not guaranteed to take the maturity
value to the level needed to pay back the loan. It may well
take the value a lot higher, but there is no guarantee.
If profits were less than expected, you would have to
find funds to cover the outstanding balance at the end of
the term. In practice this rarely happens if the assumptions
made at the opening of the policy are prudent, though there
has been a much-publicised epidemic of cases where customers
are advised during term that the investment performance
is not on course to reach the required level. Often, the
best thing to do if possible is to increase payments and
put the investment back on track, though some people decide
to cut their losses and either cash in their endowment or
sell it on the traded endowment (TEP) market.
