A low cost endowment, also called a ‘mortgage endowment’, is designed to pay either a lump sum on the date its set to mature or on the death of the policyholder. If it’s a joint policy, the sum pays out if one policyholder dies. Once a payment is made the policy comes to an end.
It is intended to help repay interest-only mortgage loans, where you only repay the interest to the mortgage lender. The lump sum will repay part or all of your outstanding loan when you reach the end of your mortgage period, or earlier if the holder/one of the holders dies during the term.
The endowment is made up of two elements — life cover (or guaranteed minimum death benefit) and a savings investment or ‘endowment’.
With a with-profits low cost endowment, the life cover element stays level but the sum assured under the endowment element can increase by additional annual bonuses which could be added during the policy term. The sum assured is the amount we promise to pay, so long as you pay all the premiums due for the term of your policy.
When it matures, the policy pays out the endowment sum assured and any annual and final bonuses that may have been added the term of the policy.
Good investment returns from how it has performed could result in the policy covering the outstanding mortgage amount, sometimes even with money left over. If investment returns aren’t high enough you could face a shortfall when paying off your loan.
These policies pay a guaranteed minimum death benefit lump sum if a life assured dies during the term. The total lump sum payable at the end of the term when the policy matures is not guaranteed and may not be enough to repay your mortgage.
Unfortunately in recent years bonuses on policies have been lower . Even with a final (terminal) bonus, the maturity value is often less than the target maturity value when the policy was taken out.
This is mainly due to lower levels of investment returns compared with the past when the UK had much higher levels of inflation and interest rates. This has led to shortfalls against many target maturity values. For the same reasons, most life companies are predicting shortfalls on these types of policy, maturing now or in the future. While investment returns have reduced a lot, we have also moved the funds that these policies are invested in to assets with lower investment risk.
The same factors that caused the shortfalls are also partly responsible for increases in domestic property values over the term of the policy. So while there’s a risk that the maturity value of your policy will be less than the target maturity value, the shortfall is likely to be lower than the increase in value of the property. This additional value could be used to help deal with the mortgage shortfall.
A low cost endowment offers lower monthly premiums than a full endowment because the amount you’ll receive isn’t guaranteed in the same way. A full endowment guarantees to pay the target value when the policy matures. A low cost endowment doesn’t.
There are two types of full endowment policy – non-profit and with-profits. A non-profit endowment guarantees the sum assured only. A with-profits endowment guarantees to pay the sum assured plus annual and final bonuses. As we explained earlier the sum assured is the amount we promise to pay, so long as you pay all the premiums due for the term of your policy.
