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Endowment Policies are effectively regular premium qualifying policies,
combining savings and life assurance cover.
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Such policies usually have a minimum term of ten years, and pay
out on maturity at the end of the specified term, on death within
the term, or on surrender before maturity.
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The pay out for qualifying policies is tax free; the small scale
policies offered by friendly societies also grow tax free.
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Growth is by means of bonus addition, either reversionary (usually
an annual bonus), or terminal (may be available depending on investment
performance), payable on maturity.
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Bonuses are not guaranteed until they have been 'declared', after
which point they are guaranteed. Until this point, the only guarantee
is the payment of the sum assured on death.
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There are a number of versions:-
- Pure endowment (not generally available).
- Non Profit - guaranteed sum assured only.
- With profits - sum assured plus bonuses.
- Low cost - relies on bonuses to build up to required target
level.
- Low start - as iv, but premiums stepped in early years.
- Flexible (issued in 'clusters' of smaller policies)
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Holders of endowment policies may find it beneficial to sell existing
policies rather than surrendering them if they wish to raise cash.
The selling price of a traded endowment generally will be greater
than the surrender value. Most traded endowment policy (TEP) market
makers prefer policies that have been in force for at least 6 years.
The best prices are normally paid for policies issued by reputable
life offices with a few years to maturity.
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Investment in TEPs represents a relatively low risk investment
with potential for a good return. The purchaser pays the future
premiums and receives the policy proceeds on the earlier of the
death of the life assured or maturity. For CGT purposes the premiums
paid by the purchaser are treated as part of the original purchase
price. The proceeds are subject to CGT but benefit from taper relief.
