Like whole-life policies, endowment policies also come in two forms, with-profit and non-profit. The distinguishing feature of the endowment is that is has a specified maturity date at which the proceeds of the policy are payable to the policyholder unless thay have been paid at his earlier death.
What are they?
The most common terms for endowments are 10 (the minimum), 15, 20 and 25 years; but policies are also issued with premiums payable to the sixtieth or sixty-fifth birthday of the policyholder, and for any other specific term the policyholder may request. The shorter the term, the higher the annual premium will be for a given sum assured, and the faster the build-up in the policy’s surrender value.
Unlike the whole-life policy, the premium for a given sum assured and term does not vary greatly with the age of the policyholder. The reason for this is that the bulk of the premiums are invested to accumulate to the sum assured at the maturity date, and only a small proportion is used to provide the term cover needed over the period. Thus, the extra mortality risk at the higher ages necessitates only a modest percentage increase in the premium.
An increase in insurance sales
The past two decades have seen the emphasis in life insurance selling switch heavily to with-profit endowments. Rising interest rates over this period have done the same damage to the non-profit endowment as they have to the non-profit whole-life policy, and today non-profit policies are rarely used except in certain special cases such as the repayment of a fixed loan advanced by the life insurance company itself.
The with-profit policy, on the other hand, has been the main beneficiary of the rise in stock market and property values in the years since 1995. For those who could afford the premiums, the short-term with-profit endowment has been the best way to participate in this rise.
How does this effect retirement?
The with-profit policy is designed to turn regular savings into a capital sum over periods ranging from 10 to 40 years. The ultimate uses of the accumulated sum are so multifarious that it would be impossible to list them; nor are most people who decide to save in this way themselves always sure what they will eventually use the money for. Certainly the urge to add to one’s savings for retirement is a powerful motive, whether the aim is to add to a basic pension that will provide only the bare necessities of life or whether to enjoy luxuries such as a world cruise on the QE2.
Other motives may be to provide a source of capital to facilitate the development of one’s own business, to provide funds for the private education of one’s children, or to enable one to buy a cottage in the country.