My Basket0

Endowment policies

Publication date:

20 December 2016

Last updated:

13 October 2018


Charlotte Warr

This article was last updated by the author in October 2016.

A brief introduction to endowment policies.



An endowment policy can be described as a savings or investment vehicle that includes an element of life cover. The policy is taken out for a fixed term. It pays out a lump sum at the end of this term, or on the life insured's death if that happens sooner. Endowments have historically been available on a with-profits or unit-linked basis. Premiums can be paid regularly or as a one-off single payment.

Typical cover provided

Endowment policies were one of the earliest forms of packaged investment. They differ from other forms of packaged investments, such as unit trusts and open-ended investment schemes (OEICs), in that they provide built-in life cover, which reduces the amount invested on the policyholder's behalf.

They are not usually suitable as a means of providing a significant level of life cover where the policyholder's budget is limited. This is because the bulk of the premium is directed towards the savings element of the contract, with relatively little providing the life cover. Surrender values are therefore likely to be non-existent or very low in the early years.

Endowment policies have a fixed term of years chosen by the policyholder at the outset. The term can be any number of years chosen by the policyholder but most policies have terms of 10, 15, 20 or 25 years. The last day of the policy's term is known as the maturity date.

The benefit of an endowment policy is the payment of the sum assured at the maturity date or on the life assured's prior death. Endowment policies are, therefore, long-term savings plans that meet the policyholder's investment objectives whether they live to see their fulfilment or not.

This lump sum will be paid out free from income tax and capital gains tax if the endowment is a qualifying policy. Broadly speaking, in order to be a qualifying policy, an endowment must provide a minimum life insurance benefit of 75% of the premiums payable over the term. This can be reduced for individuals over 55 years of age.

In exchange for following these rules, qualifying policies receive beneficial tax treatment. Tax is payable on the underlying assets of the fund at the life office's rate of up to 20%, but the proceeds of the policy will not suffer further income tax or capital gains tax unless the qualifying rules are broken or the policy is sold on as a second hand endowment.

Main types of endowment

With-profits endowments

These endowments typically have a 10 year term (the minimum to be qualifying) with the policyholder paying level, regular premiums. A guaranteed sum insured is paid on maturity or earlier death. Bonuses are added each year at the life office's declared rate. On maturity or earlier death, a terminal bonus is added based on a percentage of the total annual bonuses already allocated.

Low cost endowments

A low-cost endowment policy is, as the name suggests, a low-cost version of the with-profits endowment. The policy combines a with-profits endowment and decreasing term insurance. These policies were introduced as a cheaper way of covering house purchase loans, with the guaranteed death sum insured being equal to the loan. Although the term insurance element means there is a guarantee that the loan will be repaid on death, there is no such guarantee on maturity.

The amount payable on death is the greater of:

  • The basic sum insured plus any bonuses added to the policy.
  • The guaranteed death sum insured.

The basic sum insured increases each year with the addition of bonuses until it overtakes the guaranteed death sum insured. The term insurance element, which is the difference between the basic and guaranteed death sum insured, decreases as the bonuses are added and will cease once the basic sum insured exceeds the guaranteed death sum insured.

Low-start endowments

This is, essentially, a low-cost endowment but with premiums starting at a low level and rising gradually over a number of years to the full premium. This type of policy is aimed at the house buyer who is working on a very tight budget but who has expectations of pay rises in future years. The initial premium is very low but this is balanced by a full premium which is somewhat higher than that for an ordinary low-cost endowment for the same sum insured.

Unit-linked endowments

Here, premiums buy units at the offer price in a unit-linked fund or unitised with-profit fund (a fund split into units where the unit price increases in line with bonuses declared and does not fall or if additional units have been added these are not taken away). The contract is a qualifying policy. On death, the amount payable is either the guaranteed death sum insured or the bid value of the units, whichever is the higher.

Guaranteed bonds (single premium endowments)

A guaranteed bond is a bond where the income or the capital growth is guaranteed. It will usually be a single premium endowment for a fixed period of three, four or five years.

Guaranteed income bond

This type of endowment provides a guaranteed level of withdrawals for a fixed term, with the balance of the capital payable on the maturity date. The amount of capital payable on maturity will depend on the performance of the fund that the product is linked to. The term 'guaranteed' refers to the income and not the invested capital. Withdrawals are often annually in arrears. It is a pure investment contract for clients wanting a fixed income. Although the withdrawals are often thought of as income, they are actually a return of capital.

Guaranteed growth bond

A guaranteed growth bond pays no annual withdrawals but provides a guaranteed maturity value at the end of the term that is effectively an accumulation of the single premium at the interest rate on offer at the time. It is a pure investment contract for clients wanting a fixed return but no income.

Product providers

Historically, providers have issued a variety of regular and single premium endowment policies. You should note, however, that there is virtually no new business of with-profits endowments (although many remain in force) and the market for unit linked business is much smaller than in previous years. The introduction of a £3,600 annual premium limit for qualifying policies effective from 6 April 2013 saw most providers withdraw any remaining qualifying policies from the market. Life offices market single premium endowments contracts from time to time, usually in limited amounts or for a limited period. The rates offered vary according to the prevailing level of interest rates in the market. 

Tagged as


No comments have been added to this article.