Things You Must Know About Endowment Policy

An endowment policy is often used to pay off an interest-only mortgage. There are two parts to it – an investment part and a life cover part – and it lasts for a set time. If you die during the policy, it pays off your mortgage debt. If you live until the policy ends, the investment part should give you enough to repay your mortgage, but this is not guaranteed.

Endowments can be cashed in early (or ‘surrendered’) and the holder then receives the surrender value which is determined by the insurance company depending on how long the policy has been running and how much has been paid in to it. A tax free benefit is paid out at maturity or on earlier death (assuming a qualifying policy).

The policyholder may sell the policy in the traded endowment market, as an alternative to surrender before the end of the term, although this must be carefully considered as financial penalties will often apply.

There are charges on all endowment policies and the Key Features document from endowment providers will explain these.
Early surrender will usually incur further charges from the provider. Policy contracts are assignable, allowing the assured person to irrevocably pass the beneficial rights to a third party such as a mortgage Lender, a bank, or an investor in traded policies. A regular premium is paid (normally monthly) to a Life Assurance company. A small part of this premium goes towards providing live cover to the original lives assured, but the bulk of it provides funds for the life company to invest for the term of the contract. The profits earned on this investment are apportioned annually to each policy. This is how the final maturity value builds up in a policy.

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