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With-profits Endowment Policies in-Depth

With-profits endowment policies are as old as the hills. Basically, an endowment mortgage was a life insurance policy designed to grow over the life of a mortgage to pay off the amount borrowed. Homeowners paid the interest on their mortgage and a monthly sum into their endowment mortgage plan.

If you took out a with-profits endowment policy, you’d get a contract from your life assurance company to pay the ‘basic sum assured’ plus annual profits on a fixed future date.

You’d pay a monthly endowment premium to a life assurance company, part of which goes towards providing life cover, and part to give the life company funds to invest. The profits that build up each year on the endowment policy create the final maturity value.

Each year, the life office review their investments and decide on the profits to add to the endowment policy in bonuses. This is a way for policyholders to share the life company’s profits.

There are three types of bonus.

Reversionary Bonus

Reversionary bonuses, or attaching bonuses, are percentages of the basic sum assured and of bonuses calculated in previous years. Endowment Policy reversionary bonuses are guaranteed and can not be taken away or withdrawn.

Special Bonuses

An endowment policy special bonus is a one-off that the life company guarantees, but grants at its discretion.

Terminal Bonuses

A loyalty bonus designed to encourage you to keep your endowment policy until it matures. Its size depends on investment conditions at the time of maturity and on the performance of the life company. It can be a large part of the endowment policy final sum, but it is not guaranteed.

Bonuses can be increased or decreased from year to year, which affects the final value of the endowment policy.

 

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