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Endowments

These are policies which combine life cover with investment.

They were widely used to repay mortgages. The method was that the borrower would borrow the money on an interest-only basis, and take out an endowment which would provide life cover for the term of the mortgage, and a lump sum at the end to repay the loan and, hopefully, additional growth so that the lump sum produced a surplus over the loan amount.

This involves an inherent assumption of likely investment growth by the policy provider, and for many years the conservative assumptions meant that people not only paid off their mortgage, but often had a sizeable surplus. There is, of course, always a risk that the target amount will not be reached if investment growth is less than expected.

In recent years the economic fundamentals have changed, and the risks inherent in this approach have become more apparent. Many people did not appreciate the nature of the risk and that the policies were not guaranteed to repay the loan when the policy matured.

Furthermore, for those who wish to take that risk, there may be more tax-effective ways of doing so, (e.g. a combination of an ISA for the investment element and a term assurance or a decreasing term assurance for the protection element).

Endowments should only be used for mortgage or loan repayment by those who appreciate that there is a risk, but don’t want to (or cannot) utilise the other ways of reaching the same position, though they can result in lower monthly outlay and can be helpful in the early years for people who expect to move house frequently. Should there be a shortfall in the maturity value of the investment vehicle to meet the outstanding mortgage amount then you should ensure that you have adequate funds available to repay the loan when required.

You should NOT stop or otherwise alter any existing endowment without discussing it with a financial adviser.

Your property may be repossessed if you do not keep up repayments on your mortgage.

The value of investments can fall as well as rise and you may not get back the amount you originally invested. Past performance is not a guide to future performance.

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