Jane Dotson
Endowment insurance on a mortgage in the UK is a type of life insurance that functions as an investment vehicle. It is an interest-only mortgage with an additional savings plan in the form of an endowment policy. The monthly contributions are made to a life insurance company that invests your money in the savings plan, known as an endowment. The intention is that the payout from the endowment policy will be sufficient to repay the mortgage at the end of the term and possibly create a cash surplus.
| Characteristics | Values |
|---|---|
| Definition | An endowment mortgage is an interest-only mortgage with an additional savings plan in the form of an endowment policy. |
| Agreements | The borrower has two separate agreements: one with the lender for the mortgage, and one with the insurer for the endowment policy. |
| Monthly contributions | Monthly contributions are made to a Life Insurance Company who invest your money in the savings plan, known as an endowment. |
| Life insurance | Life insurance is built into the endowment plan so your mortgage is repaid if you die before the endowment policy reaches maturity. |
| Endowment policies | Endowment policies typically take two forms: 'with-profits' and 'unit-linked'. |
| With-profits endowment | A with-profits endowment has two bonuses: a revisionary bonus and a terminal bonus. |
| Revisionary bonus | The diversionary bonus is paid each year and is guaranteed if the policy is maintained until its maturity date. |
| Terminal bonus | The terminal bonus is paid on maturity of the policy and is dependent on the performance of the underlying fund. |
| Unit-linked policy | The value of a unit-linked policy is determined by the value of the underlying investment at the maturity date. |
| Payout | The intention is that the payout from the endowment policy when it matures will be sufficient to repay the mortgage at the end of the term and possibly create a cash surplus. |
| Risk | Endowment policies carry risks, as poor investment performance can reduce the expected payout. |
| Tax relief | Up to 1984, qualifying insurance contracts (including endowment policies) received tax relief on the premiums known as life assurance premium relief (LAPR). |
| Historical popularity | During the 1980s and 1990s, endowment policy mortgages were extremely popular as they were thought to be a good way to clear mortgage debt and provide surplus cash. |
| Mis-selling | The UK endowment policy earned itself a bad name due to the mis-selling of endowment mortgages and poor fund performance. |
| Compensation | If you think you were mis-sold your endowment policy and it was linked to a mortgage, you could be eligible for FSCS compensation if certain criteria are met. |
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What You'll Learn
Endowment mortgage explained
An endowment mortgage is an interest-only mortgage with an additional savings plan in the form of an endowment policy. The borrower has two separate agreements: one with the lender for the mortgage, and one with the insurer for the endowment policy. The endowment policy is a type of life insurance that doubles as an investment vehicle, which pays out a lump sum to the policyholder during their lifetime (i.e. when it matures) or upon their death. The monthly contributions are made to a Life Insurance Company who invests your money in the savings plan, known as an endowment.
The idea is that the payout from the endowment policy when it matures will be enough to repay the mortgage at the end of the term and possibly create a cash surplus. The underlying premise is that the premiums plus the growth of the investment will be adequate to repay the loan when it falls due. The life insurance cover can be cheaper than if purchased on its own. Life insurance is built into the endowment plan so that the mortgage is repaid if the policyholder dies before the endowment policy reaches maturity.
Endowment policies typically take two forms: 'with-profits' and 'unit-linked'. A 'with-profits endowment' has two bonuses: a revisionary bonus and a terminal bonus. The diversionary bonus is paid each year and is guaranteed if the policy is maintained until its maturity date. The terminal bonus is paid on maturity of the policy and is dependent on the performance of the underlying fund. The value of a unit-linked policy is determined by the value of the underlying investment at the maturity date.
Endowment policies were extremely popular in the 1980s and 1990s as they were thought to be a good way to clear mortgage debt. However, the UK endowment policy earned itself a bad name due to the mis-selling of endowment mortgages and poor fund performance. There is a degree of risk that is absent from repayment mortgages, and this was not always clear to the borrower. If you think you were mis-sold your endowment policy and it was linked to a mortgage, you could be eligible for compensation.
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Life insurance and investment
An endowment mortgage is an interest-only mortgage with an additional savings plan in the form of an endowment policy. Monthly contributions are made to a life insurance company, which invests your money in the savings plan, known as an endowment. The life insurance element of an endowment policy is built into the endowment plan, so your mortgage is repaid if you die before the endowment policy matures.
Endowment policies are a type of life insurance that doubles as an investment vehicle, which pays out a lump sum to you during your lifetime (i.e., when it matures). The idea with an endowment policy is that you take the lump sum and use the cash to pay off large sums, like your mortgage, your child's university fees, or to enjoy some luxuries in retirement. Alternatively, you could invest the cash in a new product.
Endowment policies typically take two forms: 'with-profits' and 'unit-linked'. A 'with-profits endowment' has two bonuses: a revisionary bonus and a terminal bonus. The revisionary bonus is paid each year and is guaranteed if the policy is maintained until its maturity date. The terminal bonus is paid on maturity of the policy and is dependent on the performance of the underlying fund. The value of a unit-linked policy is determined by the value of the underlying investment at the maturity date.
There are several risks associated with endowment policies. Firstly, there is no guarantee that the lump sum payout will be sufficient to pay off the mortgage at the end of the repayment period, as the investment could perform below expectations. Endowment plans are also less flexible than other types of investments, with most plans not allowing you to stop and start premiums, and some plans even charge penalties if you stop paying premiums.
Another concern is that the anticipated growth rates for endowment policies may not be realised due to changes in the economy or stock market performance. This can result in shortfalls that need to be supplemented by other sources. It is important to carefully consider the risks and seek financial advice before taking out an endowment policy to ensure it aligns with your long-term financial goals.
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Types of endowment policies
An endowment policy is a type of life insurance that doubles as an investment vehicle, which pays out a lump sum during your lifetime (when it matures) or upon your death. Endowment policies carry risks, as poor investment performance can reduce the expected payout.
There are different types of endowment policies, including non-profit, with-profit, unit-linked, and whole-of-life policies. Here are some examples of the types of endowment policies available in the UK:
- With-profit endowments: These policies invest your premiums, together with the premiums of other with-profit policyholders, into a fund that aims to achieve growth by investing in a wide range of assets. The endowment policy you choose may benefit from additional periodical payments throughout your policy term, and providers may aim to add annual bonuses to your policy and a final bonus on death or maturity.
- Low-cost endowments: These policies offer a lower-cost alternative repayment vehicle for an interest-only mortgage, compared to a traditional endowment policy. They are made up of two parts: a guaranteed death benefit (usually the amount of the mortgage) and a lower basic sum assured, which results in a lower monthly cost.
- Non-profit endowments: These policies do not aim to generate profits for the policyholder. Instead, they focus on providing a guaranteed payout at maturity or upon the policyholder's death.
- Unit-linked endowments: These policies invest your premiums in a range of assets, such as stocks, bonds, and mutual funds. The value of your policy will depend on the performance of these underlying investments.
- Whole-of-life endowments: These policies provide coverage for the entirety of the policyholder's life, rather than a specific term. They typically have higher premiums and may include a guaranteed payout upon the policyholder's death.
It is important to note that endowment policies may have different features and benefits depending on the provider and the specific product. It is always advisable to carefully review the terms and conditions of any endowment policy before purchasing it.
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History of endowment mortgages
Endowment mortgages were prevalent in the UK and were among the most popular ways for consumers to finance their home purchases. They were equal parts mortgage and insurance policy. Borrowers took out a mortgage or home loan with a lender and an endowment with an insurance company to match it. Borrowers made interest payments on their mortgage and regular premiums to the policy issuer on the endowment. Once matured, the endowment balance would pay off the entire principal mortgage at the end of the loan's term.
Endowment mortgages grew in popularity due to tax breaks. They hit their peak towards the end of the 1980s, with an estimated peak of more than a million policies sold in a single year. In 1982, 83% of homeowners used endowment loans. The tax advantages of endowment mortgages ended in the March 1984 budget, and the subsequent decline in the industry was stark. Only 27 sales of this product were completed in 2011-12.
The rise and fall of endowment mortgages is considered one of the most notorious mis-selling scandals of recent decades. Consumers were often led into endowments by extravagant promises of large returns. However, by the middle of the 1990s, it became clear that these expectations were overblown. Many people who were sold endowment mortgages faced a shortfall and could claim compensation for mis-selling.
Endowment mortgages are no longer offered. In the past, the borrower had two separate agreements: one with the lender for the mortgage and one with the insurer for the endowment policy. The customer paid only the interest on the capital borrowed, thus reducing the monthly payments compared to a standard repayment loan. The intention was that the payout from the endowment policy when it matured would be sufficient to repay the mortgage at the end of the term and possibly create a cash surplus.
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Compensation for mis-sold endowments
Endowment policies are a type of life insurance that doubles as an investment vehicle. They pay out a lump sum to the policyholder during their lifetime (when it matures) or to their beneficiaries if they die prematurely. The idea is that you can use the lump sum to pay off large sums, like a mortgage.
Endowment mortgages became popular in the 1990s, but they have since earned a bad name due to a mis-selling scandal. Financial institutions have been found guilty of selling these high-risk investments to consumers who did not fully understand the risks involved. Many consumers were not made aware of the risks, and the advice given was often unclear and misleading.
If you have suffered financially because of a mis-sold endowment, you can make a complaint and claim compensation. To be eligible for compensation, your policy must have been taken out after August 1988 and you must have lost money as a result. You either have three years from the date you realised (or should reasonably have realised) that you had cause for complaint.
The aim of any compensation awarded is to put the affected party back in the position they would have been in had they never taken out the endowment policy. This will take into account any fees payable to switch to a different mortgage plan, potential repayment charges, the cost of life insurance cover, and premiums and interest already paid.
If you think you have a claim, you should seek professional advice, as the rules surrounding the calculation of compensation and time limits for bringing a claim are complex.
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Frequently asked questions
An endowment mortgage is a mortgage loan arranged on an interest-only basis where the capital is intended to be repaid by one or more (usually low-cost) endowment policies. The borrower has two separate agreements: one with the lender for the mortgage, and one with the insurer for the endowment policy.
An endowment policy is a type of life insurance that doubles as an investment vehicle, which pays out a lump sum to you during your lifetime (i.e. when it matures) or upon the policyholder's death. The idea is that you take the lump sum and use the cash to pay off large sums like your mortgage.
Endowment policies carry risks, as poor investment performance can reduce the expected payout. There is no guarantee that you will have sufficient funds to pay off the mortgage at the end of the repayment period. Endowment plans are also less flexible than other types of investments, with most plans not allowing you to stop and start premiums.
