Endowments

What is an Endowment?

Endowments are a combination of life cover and investment. They are fixed term, regular premium policies and aim to pay out a cash lump sum at a fixed date in the future. The life cover aspect also means that they can pay out if you die before your policy matures.

How does an endowment work?

Endowments are paid by a regular premium (e.g. monthly, annually) rather than by lump sum. Part of the regular premium is used to pay for the life cover portion, and the rest is invested. The premium paid, your age, gender, and the length of the policy all determine the amount of life cover. Endowments have often been linked with 'With Profits Funds', but some also offer the option to invest in a wide range of funds.

Types of Endowment

• Mortgage Endowment

  Mortgage Endowments can be taken out to cover the cost of repaying an interest only mortgage. The life cover can pay off the cost of the mortgage on death, or providing there was sufficient growth, the investment part is designed to pay off the mortgage at maturity.

• Savings Endowment

  Endowments can also be used for a specific savings goal, or for general investment. A common type of savings endowment is the Maximum Investment Plan. Maximum investment plans tend to offer a wider range of funds, including funds managed by other companies, but there may be higher charges for this.

• Friendly Society Savings Plans and Children's Savings Plans

  There are certain tax advantages with saving plans from Friendly Societies. They are mutual associations, and so have no shareholders. You can save up to £25 a month or £270 per year into a fund that grows generally free of income and capital gains tax.

Tax benefits of Endowments

If you hold a policy with a term of 10 years or more then a lump sum will be paid at maturity, generally with no further tax liability. If you end the policy early you may have to pay tax on any capital growth.