An endowment policy offers life insurance cover with a savings policy. The policy exists for an agreed term, the minimum usually being 10 years, but can be for as long as 15 or 20 years, up to a certain age limit. These days an endowment policy is usually taken out as a life insurance contract designed to pay a cash lump sum after a specified term (i.e. to repay a mortgage) or upon death. Some policies also pay out in the case of critical illness.
This cash lump sum will either be a predetermined sum (in the event of death) or an agreed capital sum on maturity. You could also arrange a 'With-Profits' endowment, where guaranteed bonuses are added to the policy, usually annually.
This type of policy has traditionally been used to repay an interest-only mortgage, but is not as popular today. On maturity, the amount payable is the sum assured plus annual and terminal bonuses that have been allocated during the life of the policy.
A unit-linked endowment is similar in that it's a life assurance based plan, but premiums are invested in one or more of the insurance company's investment funds, which allows for a more flexible approach. This may be a higher risk type of plan than a With-Profits endowment.
A low-cost endowment policy does not guarantee to repay a mortgage. However, most reputable life insurers will check the performance of the policy during the term, usually 10 years before maturity, five years before maturity and then annually, to ensure that it's on target to provide the required sum. If a shortfall is likely, they will inform the policyholder of what action to take or the options that are available.
Looking to take out a policy to cover your mortgage and family in the event of your death? Compare life insurance for mortgages
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.
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