Some few words about Endowment

In the vast world of the financial products, endowments represent a very peculiar case. The use of the endowments is decreased, as per the changing stock market conditions. In the 1980s was in fact one of the most used financial instruments.

An endowment policy is a life insurance contract projected to provide an agreed amount after a settled term (also called maturity) or on earlier death. Some endowment policies may pay out in case of decisive sickness.

Endowments can be get in advance (or 'surrendered') and the policyholder will receive the surrender value that the insurance company will calculate upon how long the policy has been running.

Types of endowment

These were the most common types of endowment:

• Traditional With Profits Endowments - where an amount is guaranteed to be paid out called the amount assured; this can be increased thanks to investment performance;
• Low cost endowment (LCE) - the main purpose of a low cost endowment policy was for endowment mortgages to pay off interest only at mortgage's maturity or premature death. In most cases, the death benefit is equal to the amount of mortgage at the outset and will cover the mortgage during the term in case the life assured dies.

The objective of the low cost endowment policy is to settle the mortgage amount at the end of the term. As of March 2004 there were approximately 9.5 million endowment policies linked to a mortgage. An endowment mortgage is a type of mortgage loan planned on an interest-only basis where the capital would be repaid by endowment policies. The expression endowment mortgage is used mostly in the United Kingdom by the parts involved in this kind of arrangement and is not a legal term.

The borrower has two different agreements. One agreement is with the lending financial institution for the mortgage and another agreement is with the insurance company for the endowment policy. The agreements are separate and the borrower has the faculty to change either arrangement. Many years ago, the lending company considered the endowment policy as a collateral warranty.

The goal is that the endowment policy's investment would be adequate to repay the mortgage sum at the end of the term and, if possible, to produce a cash surplus. The usage of endowment policies has reduced, due to the stock market conditions and to the new regulation of investment advice; from 2001, using endowment policies for the repayment of a mortgage is considered something to avoid. Actually, many endowment policies taken out in the 1980s and 1990s have a little chance to pay out the amounts primarily estimated.

If you are running an endowment policy, you should have received re-projection figures, known as the famous green, amber and red letters, in order to increase the knowledge that the original targeted amount might not be reached in today's ever-changing financial climate and to inform you if your policy is going to repay your mortgage. These are called reprojection letters.

Before you surrender or sell your endowment policy, I suggest to calculate your maturity and then, if you decide to sell your policy, I suggest to check very carefully all the different proposals you may find on Internet.