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Glossary
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Buying endowment policies

Buying Endowment Policies

Endowment policies are life assurance contracts, designed to pay a lump sum at the end of a set period or in the event of an early death, depending on which comes first. Endowment policies are taken over a fixed term; however, only a third reach maturity. When buying endowment policies, different companies, have different requirements, usually that the endowment is with-profits or a with-profits whole life policy and that it has been running for some number of years. Some companies also require that the surrender value for the policy is at least £1500.

Endowment policies

Various endowment policies exist depending on your interests:

  • A full endowment is a with-profits endowment policy in which the basic sum assured is equal to the death benefit at the start of the policy, and would pay much higher than the sum assured if there is a growth in the policy.

  • When buying endowment policies, another endowment policy that is usually considered is the traded endowment policy (TEP), also known as a second hand endowment policy, which is a traditional with-profits endowment that has been sold to a new owner part way through its term. With Teps, buyers are able to buy unwanted endowment policies for more than the surrender value offered by the insurance company.

  • A unit-linked endowment is an investment where the premium is invested in units of a unitised insurance fund. Often times, when buying endowment policies, endowment policy holders can choose which funds their premiums should be invested in and in what proportions this should be done.

Teps

For anyone interested in buying endowment policies and investing directly in traded endowment policies (Teps), it is now harder than it used to be because most of the available policies have already been bought by big institutions, many of them in Germany. It is still possible to find some Teps via “market makers” – people who are in the business of selling and buying endowment policies, but it is easier to get at them through investment trusts whose assets are based on Teps.

  • Buying endowment policies as Teps can make attractive investments, particularly for those with a deadline to match with an investment, such as retirement or paying school fees.

  • Tep investment trusts have a specific end date so it should be easy to match dates.

  • In a trust, you do not have to buy a Tep directly – which could thousands of pounds - so you can limit the amount you are investing.

Anyone looking to invest in Tep policies, either directly or via a trust fund, should understand the profits being delivered from the funds. Past performance is no indicator of good future returns. Your adviser should be able to research to see how the firm providing the endowment is investing the fund. Companies like Prudential and Liverpool Victoria are recommended for Teps investments as they have a higher proportion of their underlying with-profits funds in equities.

Endowment polices have high charges up front, and this has put investors off. The beauty of a Tep is that someone else has already paid those fees at the start of the policy, so buying endowment policies in this way is cheaper.

Life insurance

Another point about buying endowment policies like direct Tep investment is that you have to keep the specific premium payments up to maintain the investment. Part of an endowment policy is life insurance, and when a Tep is sold, the insurance still covers the person who originally took out the endowment policy. However, it seems that any payment made by the policy on that person's death goes into the Tep. That may not fit comfortably with everyone.

The advice when buying endowments is to look for a Tep investment over three to five years – the back end of an endowment policy.

Learn more about investments

 
 
 
 
 
 
 
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