Repayment Options
Endowments
| With profit | Low
cost | Unit linked
| Other | Advantages
| Disadvantages
Full With Profit Endowments
The most expensive of all the endowment plans, full with
profit endowments have the highest guaranteed returns, but
is being offered less and less by UK life insurance companies.
This type of endowment guarantees an annual growth rate
and also guarantees to pay off the full loan at maturity.
This is the only type of endowment that offers this guarantee,
which is the cause of the added expense.
At the outset, some assumptions are made about the future
growth rate of your investment. These assumptions govern
the size of the premiums that you will pay into the fund.
Part of the premium with a full with profit endowment
is used to pay for the built-in life insurance cover. The
life insurance element ensures that the endowment policy
will have a guaranteed death benefit, which will be for
the same value as the mortgage, thereby ensuring that the
debt will be paid off even if you die.
The portion of your premium that is being invested is pooled
with the premiums of other investors. These are then paid
into a fund managed by the life company.
Annual bonuses are added to the maturity value each year.
The size of these bonuses depends partly on the performance
of the investment fund, so in a sense you are sharing in
the profits of the company. Once added, these bonuses cannot
be taken away.
There is also a final bonus that depends partly on the
performance of the fund over the entire term. The terminal
bonus may represent a large portion of payout and is guaranteed
to be at least enough to repay the loan.
There is a possibility that the bonuses will take the maturity
value above the level required to pay back the loan. This
would result in a tax-free cash surplus, which you can spend
on whatever tickles your fancy.
The maturity value grows throughout the life of the policy.
The large size of the final or terminal bonus makes it rare
to be able to cash in this type of endowment policy early
without losing out and if you do so, you may well end up
getting back less than you put in.
