• This is general product guidance only. It is not a comprehensive guide to the terms and conditions of your policy. If there is any discrepancy between this guide and your policy terms and conditions, or HM Revenue and Customs (HMRC) rules; then those terms and conditions, or rules, will apply to your policy in preference to this guide. In all cases, we recommend that you look at your policy document for the terms and conditions that apply to your policy. If you are in any doubt, we recommend that you take your own independent legal or financial advice as to its terms and conditions or any HMRC rules.
• This guide covers with-profits low cost endowments only, and not unit-linked policies.
What is a low cost endowment?
A low cost endowment (also known as a ‘mortgage endowment’) is designed to pay either a sum assured plus any declared bonuses, or a guaranteed minimum death benefit. It is commonly used to assist with the repayment of mortgage loans, particularly where you make monthly interest-only payments to the mortgage lender.
The aim of a low cost endowment is to provide a lump sum, either when the policy matures, or upon the death of the life, or one of the lives, assured. The lump sum is used to repay part, or all, of your outstanding mortgage loan, dependent on the balance outstanding on the mortgage loan when the policy matures, or earlier, if the life, or the other lives, assured die during the term.
Are payments guaranteed?
The policy guarantees to pay either:
• the guaranteed minimum death benefit if the life, or one of the lives, assured dies during the term; or
• the sum assured, and any declared bonuses, at maturity.
It does not guarantee to repay your mortgage either at maturity or in the event of a death claim.
How does it work?
A low cost endowment is made up of two ‘sums assured’ – a life insurance element known as ‘decreasing term insurance’, and an investment or ‘endowment’ element.
With a with-profits low cost endowment, the sum insured under the term insurance element goes down each year and, alongside this, the endowment element has the potential to increase through the addition of such annual bonuses as are declared, in relation to the policy, throughout its term.
If the life assured, or one of the lives assured, dies during the term of the policy, a guaranteed minimum death benefit is paid that can be used to repay part, or all, of the outstanding mortgage loan, dependent on the balance then outstanding and due.
When it matures, the policy pays out the endowment sum assured and any declared annual, and final, bonuses, which can be used to repay part, or all, of the outstanding mortgage loan, dependent on the balance outstanding at that time. If investment returns have been sufficiently high, throughout the term, as to enable bonuses to be declared, there is the potential to produce an additional amount, on top of the originally identified target maturity value. However, if investment returns have not been sufficiently high, it is possible that no bonuses will have been declared, meaning that there would be no additional amount payable. Low investment returns could also lead to a shortfall when your policy matures and you may need to find another means of paying off your mortgage loan.
I have been advised there may be a shortfall on my policy and that it may not meet the target maturity value identified when I took out this policy. Why is this?
Unfortunately, in recent years, the bonuses that have been declared on policies have been lower than was previously the case and, even if a final (terminal) bonus is included, the maturity value is now often less than the target maturity value, if any, identified when the policy was taken out.
This is mainly due to lower levels of investment returns in recent years, compared with the past when the UK had much higher levels of inflation and interest rates. This has led to actual and predicted shortfalls against many target maturity values. For the same reasons, most life companies are predicting some shortfalls on these types of policy, maturing now or in the future.
The same economic factors that have caused the shortfalls are also partly responsible for the increases in domestic property values over the term of the policy. So, while there is a risk that the maturity value of your policy will be less than the target maturity value identified when you took the policy out, the shortfall is likely to be lower than the increase in the value of the property over the same period of time.
What is the difference between a low cost endowment and a full endowment?
A low cost endowment is so called because the sum assured, and as a consequence the monthly premiums, are lower than for a full endowment which has a sum assured equal to the target maturity value identified when the policy was taken out, and which guarantees to pay the target value at maturity.
There are two types of full endowment policy – ‘non-profit’ and ‘with-profits’. A non-profit endowment guarantees to pay the sum assured only. A with-profits endowment guarantees to pay the sum assured plus any additional, and final, bonuses declared over the term.