Endowments, what the terms used mean... (General Comments)

Name: pphb

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Product:	General Comments
Date:	06/01/02 (365 review reads)
Rating:

Advantages: Life cover included

Disadvantages: may not hit target

There are many types of Endowment policy, the ones I talk off are low cost or easy start - these are where the premium would be increased gradually over a specific amount of years. I have been exposed to only these policies & the details I will give refer to them (even though most policies have the same rules) Some policies have a guarantee that they will hit the target....if you go ahead with all recommendations!

Here are some helpful terms.

Basic Sum Assured - This is an amount the insurance company puts into a pot to gain your bonuses on every year. This amount is what will gain the full amount required to pay off your mortgage, if it's connected.

Guaranteed Minimum Death Benefit: This is the amount you will receive in the event of death (same as your target amount)

Reversionary Bonus: This is an amount the insurance company will add to your policy yearly, you will get an annual bonus statement. These bonuses are not guaranteed & are decided on by the performance of the company (around 2% of the basic sum assured + existing bonuses)

Terminal Bonus: This is an amount you will receive at the end of the policy, this can be quite large, can give you a surplus & is tax free. Once again at the discretion of the Insurance company.

Surrender Value: This is an amount you would receive if you wish to surrender your policy. In the first few years the surrender value will not even match what you have paid in. The first few years premium will go on costs of setting up the policy, life cover etc. You can also receive projected surrender values.

Making a policy Paid Up: This is when you no longer wish to make payments to the policy but also wouldn't want to lose a lot of the money you have paid in. You can ask the insurance company for a Paid up quote. They will recalculate your Basic sum assured & the policy will continue to earn bonuses to the maturity date. The insurance company would p
roject an amount they think you may receive. The life cover element may also reduce or stop completely.

REVIEW CLAUSE
Some policies have a review clause which means that the insurance company will review the policy & you have to increase the premiums to keep the policy qualifying (there would be tax implications otherwise - this may affect you more if you have a larger income, worth checking this out before you do anything) If you decided that you didn't want to increase the review clause would be removed meaning that they would not be obliged to review your policy again & you may be even more off track at maturity.

GUARANTEE
Some policies have a guarantee that you will meet the target amount.....if you go ahead with all their recommendation, which could mean any number of increases - the premium will never decrease.

There is also the 10 year rule. In the last 10 years of the policy any increase has to be done - no authorisation is needed. If you decide to decline this the guarantee would be lost & no more reviews would take place - tax implications may also apply.

It's not usually beneficial to surrender a policy (you can sell them for slightly higher than the surrender value as some companies buy them - remember you will still be a life assured on this!) but the best thing to do is get proper financial advice. If you took your policy out from 1985 or later & have not had a review it would be worth asking for a projection of these (a policy that has a review clause can only be reviewed on it's anniversary - so a projection is good in the meantime, otherwise they will remove the review clause & the guarantee - if it has one)

On a last note there are also Unit Linked policies these are linked to certain funds. Examples, secure fund, managed fund, equity managed fund etc. You decide the fund you want these to be invested in. Best to check as some people are sold these & not told that they can
switch funds a certain amount of times each year for free! They end up having the whole 100% in a low risk fund that doesn't give good returns. Check this & go through the funds with your financial adviser & decide how risky you want to be, you can split them so you could have say, 50% in a secure funds 25% in a managed fund (medium risk) & 25% in a high risk fund. you have to pay close attention to these & it may be worth asking for the funds performance over the last 5-10 years before you choose.

I hope that wasn't too long & boring (I have a terrible feeling it was!!)

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