What are endowment policies?

You can get a new endowment as an investment that includes life insurance. If you have one already, there are several ways you can get a payout. Here is everything you need to know about how they work.

Older couple with advisor

What are they?

Endowment policies are long term investments that include life insurance.

You pay a set monthly amount for between 10 and 25 years, and when the policy matures you get a cash lump sum.

You could use an endowment policy to either:

  • Save a lump sum that you can spend however you like. These usually run for ten years, and you get a payout when it matures.

  • Pay off your mortgage at the end of its term. They are taken out alongside an interest only mortgage. Your mortgage covers just the interest on what you owe, and the endowment is designed to pay off the balance when it ends.

Part of your premiums go towards the life insurance you get with the policy. If you die before the policy ends, the insurance pays out to the beneficiary you choose.

But most is invested by the endowment provider in stocks and shares. The amount you get on maturity depends on how well its investments perform.

Do you have one?

What companies offer endowments?

Endowment providers are either:

  • Life assurance and insurance companies

  • Friendly societies, who offer savings plans and children's accounts

What are your options if you have one?

  • Wait until maturity: You can continue to pay into your policy every month until it matures. You then receive the lump sum at the end of the term.

  • Stop making payments: Some providers let you keep your endowment until maturity but without paying any further premiums. The amount you get at maturity and your life insurance payout if you die could both fall.

  • Surrender your endowment: You could cancel your policy before maturity and receive a payout from the provider. This amount is usually much less than the maturity amount would be.

  • Sell your endowmentSelling your policy to someone else could get you a lump sum that comes to more than your provider would give you if you surrender it.

Should you keep, surrender or sell your endowment policy?

What types are there?

There are several types, and if you have one already your statement should tell you what type it is. If you cannot find it, ask your provider.

You can get:

Non profit endowment policies

These are designed to pay a specific amount when they mature. For example, one taken out alongside a mortgage aims to cover its entire balance at the end of the term.

Their premiums are lower than policies that let you make a profit. They come with life insurance that pays off your mortgage if you die before the end of its term.

With profit endowment policies

These are designed to pay out an agreed lump sum (e.g. enough to pay off your mortgage), plus an extra amount if the investments made a profit.

However, the amount they pay on maturity is not guaranteed. If the investments do not perform well, the maturity payment may not be enough to pay off your mortgage.

Unit linked endowment policies

These let you use your premiums to buy units in investment funds offered by your provider or by other investment companies.

You can usually choose which funds you invest in and change them during the policy's term.

How much your endowment pays out when it matures depends on how well the investments perform. This means its value can go up and down.

Whole of life endowment policies

These are policies that include life insurance that lasts for the rest of your life instead of a specific term.

They can pay out a lump sum or enough to clear your mortgage balance if you die before you pay it off.

What type of bonus do you get?

If your endowment includes a chance of making a profit on top of the lump sum it aims to meet, it pays this profit as a bonus.

  • Terminal bonuses are paid if you keep the policy until it matures. They can make up more than half the final amount you get, but they are not guaranteed because the amount depends on how well the policy's investments perform.

  • Annual bonuses (also called reversionary bonuses) are paid on some policies each year, and the amount paid depends on how well the investments perform.

  • Special bonuses are sometimes paid by your endowment provider in certain circumstances, e.g. if it is a friendly society that changes to a public company.

Bonuses are added to your endowment's balance, meaning you get the amount when your policy matures or you sell it. The amount depends on how well your endowment company's investments perform.

Can you still buy an endowment?

You can usually only get endowments as investment plans now.

You could buy either a new endowment or a second hand policy on the Traded Endowment Policies (TEP) market.

You can buy an endowment policy through a financial adviser or directly from a provider like an insurance company.

Using a financial adviser means you can get impartial help in choosing a policy that suits your finances. They can also explain the risks of the policy and suggest alternative ways of investing.

What happened to mortgage endowments?

Endowments are not usually sold alongside mortgages any more because many of these policies were mis-sold. People were not informed of the risks of the investment and their payouts were much lower than expected.

This meant many endowments paid out less than the amount paid into them or did not pay enough to cover the full mortgage balance.

They are also less attractive now because they no longer offer the tax relief and investment growth rate they came with in the 1980s.

What to do if you were mis-sold a policy