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Other forms of investment type Life Insurance

LIFE INSURANCE

With-Profits Endowment

A commitment to save a fixed amount, usually monthly or yearly, for a fixed term chosen by you at the outset of 10 to 25 years or more. In return a life (usually your own) is insured for a fixed amount to which profits called reversionary bonuses are added. The rate of bonus can rise and fall but once a bonus has been added to a policy, it is guaranteed. The fixed sum insured plus bonuses, plus with most companies a discretionary terminal bonus are paid when the term ends or on earlier death. With unitised contracts which are offered by many companies, the bonus is added to the unit price instead of ths sum insured.

New endowment mortgages are not recommended. But if you are well into one, neither should you cash the policy. Some life companies have asked savers to raise the amount they pay each month towards their endowment policy. If you are in that position, you would do better to instead raise the payments on your mortgage to your bank or building society by the extra amount the life company has asked you to pay to them. By doing so you will have converted your mortgage to a part-repayment mortgage.

You can buy second-hand endowment policies see Life Insurance Traded Endowment Policy which could be of interest to older people or if you suffer from a chronic illness.

Who can invest Anyone in good health. Better value the younger you are. The insured can be yourself or anyone in whom you have an insurable interest (e.g. husband or wife). Joint policies available.

How worthwhile Poor value. It is impossible to know which company will do well or badly which depends onthe financial strength of the company as well as investment conditions over a long period of time. For lump sums consider Life Insurance Traded Endowment or Life Insurance With Profits Bond

Minimum £10 to £50 a month.

Maximum None.

Suitable Regular savings.

Money back On maturity or death. You can stop saving at any time and take your money, the surrender value; or leave it paid-up in the policy. In the first few years you can lose most if not all your savings; even well into the policy there can be a heavy deduction with some companies.

Interest Variable. Based on bonus rate at the discretion of the life company.

Interest paid When policy matures or the person insured dies.

Tax The insurance company pays tax on the income and capital gains it makes which reflects in your bonus rate. There is no tax on the proceeds but there can be extra tax for higher rate taxpayers, currently 18%, if you cash a policy before 10 years or if it is a non-qualifying one.

Fees to pay Premiums usually include a policy fee (e.g. £3 a month) which make a £100 a month policy better value than a £25 a month one.

Passbook None. Insurance policy.

Children Policies can be in trust for children to avoid probate and inheritance tax.

Risk The terminal bonus may account for up to 65% of the proceeds of a 25 year policy which makes with-profits a potentially risky investment as a terminal bonus can disappear overnight if the company decides to reduce or remove it. UK authorised insurance companies are covered by a 90% compensation scheme less 'excessive' benefits.

How to invest Don't. Past performance isn't much good: for instance according to Money Managment (April 2002) for a 25 year policy ending in 2002, only two of the nine companies which were best for a 25 year policy ending in 1977, were among the best in 2002. For a 10 year term policy, only one of the 10 companies which were best for a 10 year policy ending in 1992, was among the best for a 10 year policy ending in 2002.

Where from Life companies and investment advisers.

Other forms of investment type Life Insurance

Last updated 26 March 2011.