Endowment Policies
Commonly used towards repaying home loans, an endowment policy is a long-term investment scheme which includes life insurance and consists of paying a monthly premium to an insurer, in hopes that when the policy matures, enough capital will have been resulted to pay the loan, usually supplemented by an extra amount of money the investor receives. Endowment policies were very widespread three decades ago and maintained their attractiveness throughout the 90s, yet are increasingly declining in popularity due to the fact that previous estimations of their performance seem to have been unrealistic. As a mandatory feature, they comprise life insurance.
Endowments customarily mature after 10 to 25 years, ten years being the minimum interval, and theoretically can be used for reimbursing any type of loan; in practice however they have been used to repay interest-only mortgages. In the past, people have often preferred this option as it granted them a chance to obtain a mortgage even if they momentarily lacked the funds to start repaying the capital. Nonetheless, akin to any investment plan, endowments are a gamble, their evolution depending on the fluctuating financial market, and not only are they not guaranteed to bring investors a lump sum after maturing – they are not even guaranteed to cover the mortgage.
According to the features they provide, endowment policies can be classed into five categories, namely with profits (the most frequently used type), unit linked, flexi endowment, friendly society plans, low cost and low start. With profits endowments, as mentioned above, involve bonuses being paid to the investor, usually when the policy matures, the sums increasing periodically (for instance yearly). Unit link endowments provide more flexibility, as investors can choose the funds their money is invested in; they take their name from the units investors buy in those particular funds.
The distinctive trait of the flexi endowment is that of allowing investors options of cashing their money in after a predetermined period of time, without paying additional penalty fees, while friendly society plans are less strictly taxed. Compared to with profit endowments, low cost endowments are seminal in terms of the financial mechanism yet cheaper and solely aiming to repay the mortgage they are linked with. And finally, low start endowments are more indulgent where premiums are concerned, as investors pay lower sums to start with, their value gradually increasing over a period of five years. This type of investment plan mainly targets first time buyers, which need as much lenience during the first years.
There is also the option of complaining about your endowment policy if you feel you were misled by your insurer. However, you may only complain about the guidance you received towards buying it (for instance if it was unsuitable for you, if the sale was carried out incorrectly, if more advantageous options for you were omitted by your insurer etc.), as the poor performance of an endowment is considered a risk you took as an investor. You may also surrender an endowment policy to your insurer or sell; it to a third party, which is becoming very common.