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Endowment Policies Reviewed

Endowments were a popular mortgage accessory in the 1980s and 1990s. Combining life assurance with investment growth into one package, they were used as a method of repaying a mortgage and were sold on the basis that they cover the mortgage repayment at the end of its term and have some money left over.

Sadly, by 2004, of 8.5m endowments that remained, 6.8m were forecast to fall short of the mortgage they were supposed to pay off.

In an endowment mortgage, the holder does not pay off and of the capital borrowed during the loan’s term. The endowment policy is intended to grow throughout the period to provide a lump sum at the end which is at least big enough to repay the loan. The monthly repayments consist of the interest on the mortgage loan and a premium for the endowment policy. But the policy has no guarantee that it will pay off the mortgage capital. The policy does have a life assurance element that will pay off the mortgager should you die.

Where repayment mortgages, repayments consist of interest and capital repayments, so at the end of the term the mortgage is always paid off. But for endowment policy holders, shortfalls have become an irritating fact of life.

The theory, which helped to sell so many endowment policies, was that the policy would grow so much that there would be an excess of money from the policy at the end of the loan term. This could be spent by the borrower on anything they liked. This has not happened very often in recent years.

Of course, when endowment policies became popular in the early 80s, there was high inflation and interest rates, and there was tax relief on endowment premiums. All the calculations favoured taking out an endowment policy to make a good lump sum in the future.

Things changed: tax relief was taken away; inflation was brought down, and interest rates came down too. This hit the investment into endowments, and people’s hopes for large lump sums.

Endowments were also popular with salesmen as they came with ‘front-loaded’ commissions. Salesmen got their commission up front, but consumers got little, if anything, back if they stopped paying their premiums in the early years.

The fact is that only a third of endowment policies actually reach their maturity date. For a number of reasons, the rest are cashed in early, and customers receive less money back than they have actually paid in. The advice is not to cash in an endowment policy early unless you really have to.

In many cases, about half of the endowment payout comes on the very last day of the term. This is the terminal bonus – and it is not guaranteed. Stopping payments before then will mean missing out on this bonus.

Many endowment policy holders now face shortfalls, and are often encouraged to make increased contributions to attempt to make up the difference. This may seem like throwing good money after bad, and an alternative, such as paying the extra contribution amount into an ISA, may prove to be a better option, cashing in the ISA as well as the endowment policy when the time comes to pay off the mortgage.


Tom Smith
6th June 2007

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