Endowment Plans

Endowment policies are made up of an investment, as described below and a life assurance policy. Should the owner(s) of the policy die during the term then the sum assured would be used to repay a mortgage and if plan reached maturity then it would be expected to provide a lump sum sufficient to repay the mortgage. Critical illness cover could also be included.

Many people still have endowment plans designed to repay part or all their mortgage. These days, very few endowment plans are arranged following dismal performance in the 90's which has resulted in many people being told that their endowments may not be sufficient to pay off their mortgages.

There is a market for existing endowment plans so if you are considering cashing in a plan or would like to invest in an existing endowment you may do so through an endowment trading platform - we can help you with this.

Why did endowments go wrong? 

Back in the 70's and 80's inflation was high and, subsequently, so too were investment returns. Saving £50pm for 25 years often yielded £100,000 from a with profits fund ('with profits' is a collection of investment classes from which life assurance companies made a profit and distributed this to policyholders). But since the 90's investment returns have been much lower than the 70's and 80's and this affected maturity values. To put this into perspective:

Saving £50pm for 25 years with a compound investment return of 12.5% produces a maturity value of £102,695. The same investment achieving only 4%pa has a maturity value of £25,706. Clearly, the difference is huge and the only way to make up the shortfall is to increase the premium... in this case to achieve £100,000 an investment returning 4%pa requires a premium of £195pm. The extra premium to keep the endowment on track seems very high but in reality it was not when you consider what happened to interest rates.

Those people that had endowment mortgages saw the greatest saving in monthly mortgage costs when interest rates reduced compared to those people that had repayment mortgages. For example, during the 90's we saw interest rates fall from 15%pa to 6%pa and if you had a repayment mortgage of £100,000 over 25 years your payments to the lender would have reduced by £636.53pm but if you had an endowment mortgage your payments would have reduced by £750pm. Had this difference been channelled into another investment (e.g. an ISA) or used to reduce the mortgage balance then the outlook for people with endowment mortgages would have been much better. This shows the importance of regularly reviewing investments.