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Types of Endowment policies

Types of Endowment policies

> With-Profit Endowment

One of the most popular endowment policies sold in the UK is a with-profit endowment. Offered by life assurance companies, with-profit endowments pay the buyer a fixed sum (called the basic sum assured), in addition to earnings from investments made by the company. The basic sum assured plus the investment profits are paid after a predetermined length of time, as long as the policy holder has also been consistent with the monthly payments they agreed upon.

There are two options offered for with-profit endowments:

Full With-Profit Endowment – includes a guarantee for the full value of the loan by the end of the maturity period. Usually more costly, it also offers the policy holder the lowest level of risk because whatever happens, they still recover at least the whole amount of the mortgage loan, plus bonuses if the company’s investments turned out to be profitable for the duration of the endowment’s maturity period.

“Low-cost” With-Profit Endowment – does not come with a guarantee for the full value of the loan. Rather, only a portion of the mortgage loan amount is assured of being returned to the policy holder by the end of the policy’s maturity period. This is the less expensive option if you can deal with the higher level of risk. When the endowment matures, profits from the company’s investment are added to the lump sum (through a bonus system) to recover the rest of the loan’s value.

> Low Start Endowment

A low start endowment features smaller initial premiums that progressively get higher over time until the endowment matures. Payments are usually at their highest by the last 15 years of the policy.

First time homeowners find low start endowments attractive because it allows them to match their expenditure with the starting level of their income and then lets it grow in pace with their (ideally) upward financial mobility.

> Non-profit endowment

A non-profit endowment, as the name suggests, has no stock investment component. It is not designed to pay off a mortgage; rather it is bought for the life cover it provides. As such, it is not a very popular choice for endowments as most buyers purchase endowments in order to help them pay off their mortgage loans.

> Unitised with-profit endowment

Another form of with-profit endowment, the unit rates are calculated annually and then guaranteed in order to establish a minimum income “floor”, no matter what the actual market conditions are for the rest of the year. By doing this, any impact from a fluctuating market is minimized and it keeps the level of risk very low for the policy holder.

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