Cashing in an Endowment Policy Secondhand

Endowments: trick or treat?

(This is money web site)

Endowments have become increasingly controversial in recent years, yet many homebuyers still take one out to repay their mortgage. Here we explain the key issues for borrowers.

What are endowments?

They are complex products which wrap up life insurance and investment growth in one package. They are most commonly used as a way of repaying a mortgage - years ago eight out of 10 borrowers had endowments, now it is less than one in three.

How do they work?

With an endowment mortgage, you do not repay any of the capital you borrow during the term of the loan. Instead, the endowment policy is supposed to grow to produce the lump sum you need to repay the loan in full at the end of the pre-agreed period, normally 25 years. Your monthly payments are made up of interest on your mortgage loan and the premium for the endowment. Within the package you also pay for life insurance which will repay the loan if you die.

What is the big drawback?

That there is no guarantee that your endowment will pay off your mortgage. This is not the case with the traditional repayment method.

What is the point of an endowment then?

An endowment might grow to more than you need to repay your loan, so giving you an extra bonus to spend on anything you like. But the world has changed dramatically against endowments so this is far less likely to happen nowadays. When they first became popular, in the early 1980s, inflation was roaring, interest rates were high and you got tax relief on premiums paid to an endowment. So the sums worked in favour of endowment mortgages - they looked like great ways to repay homeloans.

What has changed?

Tax relief on endowment premiums vanished years ago and inflation and interest rates have fallen hitting investment growth. Many people are finding that their endowments won't produce enough to repay their loans after 25 years, let alone produce the hoped for surplus.

So why do people buy them?

Because home loan firms and middlemen such as estate agents get large commissions for selling them. The charges tend to be 'front-loaded' - ie most of it is paid up front and so for several years you will get little if anything back if you have to stop paying the premiums.

But how likely is this?

Statistically very likely. Only one in three endowments reaches its maturity date. The rest, for whatever reason are cashed in early - with the customers getting back less than they have paid in.

So I need to keep paying the premiums?

Absolutely. On average around half of the total payout on an endowment comes on the last day. This is the so-called terminal bonus, which is not guaranteed, but makes up a large amount of the total payout. Stop paying in before then and you are likely to lose this. Instead, you will only get the benefit of the annual - or reversionary - bonuses which are added to your policy.

What if my endowment firm tells me the policy is not growing fast enough to repay my loan as planned?

Hundreds of thousands of people have been told this recently. Often people are advised to make extra monthly contributions to the endowment, though this can feel like throwing good money after bad. If your lender says you need to pay an extra £50 a month, for example, you could pay it into an Isa instead and use the money you make there to top up any shortfall produced by your endowment when your mortgage matures.

You could get more money for your policy by phoning this number - 0800 072 1972 - or by clicking this link here.