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Types of policies
> With-Profit
Endowment
One of the most popular endowment policies
sold in the UK is a with-profit endowment. Offered by life
assurance companies, with-profit endowments pay the buyer
a fixed sum (called the basic sum assured), in addition to
earnings from investments made by the company. The basic sum
assured plus the investment profits are paid after a predetermined
length of time, as long as the policy holder has also been
consistent with the monthly payments they agreed upon.
There are two options offered for with-profit
endowments:
Full With-Profit Endowment –
includes a guarantee for the full value of the loan by the
end of the maturity period. Usually more costly, it also
offers the policy holder the lowest level of risk because
whatever happens, they still recover at least the whole
amount of the mortgage loan, plus bonuses if the company’s
investments turned out to be profitable for the duration
of the endowment’s maturity period.
“Low-cost” With-Profit Endowment
– does not come with a guarantee for the full value
of the loan. Rather, only a portion of the mortgage loan
amount is assured of being returned to the policy holder
by the end of the policy’s maturity period. This is
the less expensive option if you can deal with the higher
level of risk. When the endowment matures, profits from
the company’s investment are added to the lump sum
(through a bonus system) to recover the rest of the loan’s
value.
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Low Start Endowment
A low start endowment features smaller initial
premiums that progressively get higher over time until the
endowment matures. Payments are usually at their highest by
the last 15 years of the policy.
First time homeowners find low start endowments
attractive because it allows them to match their expenditure
with the starting level of their income and then lets it grow
in pace with their (ideally) upward financial mobility.
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Non-profit endowment
A non-profit endowment, as the name suggests,
has no stock investment component. It is not designed to pay
off a mortgage; rather it is bought for the life cover it
provides. As such, it is not a very popular choice for endowments
as most buyers purchase endowments in order to help them pay
off their mortgage loans.
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Unitised with-profit endowment
Another form of with-profit endowment, the
unit rates are calculated annually and then guaranteed in
order to establish a minimum income “floor”, no
matter what the actual market conditions are for the rest
of the year. By doing this, any impact from a fluctuating
market is minimized and it keeps the level of risk very low
for the policy holder.
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