An endowment policy is an investment product that you can take out with a Life Assurance company. You pay a regular set amount into the policy, and at the end of the term they pay out a lump sum, plus a bonus if the investments perform well.

Endowment policies are often used as repayment vehicles to pay off an interest only mortgage, or other borrowing. If this is the case, the amount you receive when the policies should be enough to pay off the balance of the mortgage, and if you're lucky a bit extra too!

For more information on endowment policies, read our guide; Endowment Policies: The Basics.

What is a unit-linked endowment policy?

Unit-linked endowments are essentially run the same way as a unit trust. The premiums you pay into the fund will be used to buy units in a fund or number of funds run by fund managers.

Depending on your policy you may have the option to choose the investment funds you invest in and you may also be able to switch between funds without cashing in your policy. These funds could be run by your insurance provider, or they could be managed by separate investment companies.

Pros and cons of unit-linked endowment policies

Unit-linked endowments offer more risk than a with-profits option, but with high risk comes the potential for higher reward. If you invest wisely you can see far better returns through a unit-linked endowment.

However, since the value of these units is dependent on the performance of the funds they are invested in, which will change constantly, the value of your endowment will also change constantly. There is also the risk that you may get back less than you in invested in your unit-linked endowment policy.

What's a unitised endowment policy?

A unitised endowment is a sort of hybrid of unit-linked and with-profits policy, where the value of the units accumulated in the plan is declared each year, and the value is guaranteed. But the 'real' value of those units will not be met until the end of the plan, so you will be unlikely to be able to pay off your loan early.

If you are considering selling your endowment policy, have a read of our guide Should I Sell My Endowment Policy? for more information.