An endowment policy is an investment product bought from a life assurance company. You make regular contributions to your endowment policy and then at the end of a set term you will be paid a lump sum. The value of your endowment can go down as well as up so you may get back less than the total you saved.
An endowment policy includes life assurance, and this means it will pay out if you die while the policy is in force. You make regular payments into your endowment called premiums, that go towards paying for your life assurance policy. The cost of this life assurance will depend on your sex, age and length of endowment required. The remaining money left is invested either on a with-profits basis or a unit-linked basis.
The insurance company adds your funds to those of other people’s endowment savings and decided where to invest these. This could include investing in shares, property or fixed interest investments. The insurer uses the income made from the investments to pay their operating costs and then any money left over is paid to those holding endowments as a bonus. These bonuses are added to the value of your life assurance policy.
This is where you decide where to invest your monthly premiums yourself. This may be into funds offered by the life insurance company or unit trusts offered by different companies. You can switch your funds but will need to check if this will involve a fee.
You cannot access your money in your endowment until it matures, however you can choose to surrender this early back to your endowment provider with the risk that you will get significantly less than the amount you would receive at maturity. An alternative is to
sell it to a third party on the Traded Endowment Policies (TEP) market. These are companies that buy endowment policies as part of their investment portfolio. When you sell an endowment, the policy continues to run until the end date, but the name on the policy is changed to the new owner . The new owner will then pay the regular premiums and receive the value of this once the endowment matures. The life of the original owner remains insured and if they die before the endowment matures, the new owner will receive the life insurance payout.
You will receive a lump sum at the time your endowment is sold to the third party.
Most sales of endowment policies are done without advice, this means that if the decision to sell your endowment turns out to not have been in your best interests it is significantly harder to raise a complaint or a claim against the firm who bought the endowment. A financial adviser can provide you with advice about selling your endowment.
If you decide to sell your endowment policy, you should check if this will affect any of the bonuses you have already earned – sometimes these may be clawed back.
Before you sell your endowment, you need to know which insurer provides this and your policy number, the maturity date, the value of your endowment policy and the type of endowment policy that you have. You should also compare the value of offers made on the TEP market with each other and your surrender value.
Most firms only buy with profit endowments and will want these to have at least a year before and no more than 20 years to the maturity date. They may also not want to buy a policy that has a surrender value of less than £3,000.
If you sold your endowment you would also lose the benefit of life insurance as well. If you have taken out an endowment alongside an outstanding mortgage, then your beneficiaries would not receive any pay-out if you died and any outstanding mortgage balance would potentially remain unpaid.
You can save up to £25 per month in a Tax Exempt Savings Plan without having to pay tax on the income. These are life assurance policies that often include a minimum guaranteed return.
There should be no fees or charges for a quote from a Traded Endowment company.
It typically takes three weeks to process the sale of an endowment and to receive your funds.
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.