||Bookmark this page!
insurance policies that pay a sum at a set date or on the holder's
death. They are complicated policies that combine life insurance
with investment growth. In the 1980s and 1990s, they were commonly
used as a means of paying off a mortgage. The problem: as of 2004,
6.8 million of the 8.5 million existent endowments were not expected
to be able to pay off the full amount of the mortgages.
Endowment mortgages were plans wherein homeowners would not repay
any of the borrowed capital during their loan's term. Instead, they
would pay into the endowment, which would grow enough to repay the
loan at the end of the term, usually 25 years. On a monthly basis,
homeowners would only have to pay the interest on the loan along
with the endowment's premium. This premium also included life
insurance so that if the homeowner died, the loan would still be
repaid. But there was no guarantee that the endowment would grow
large enough to pay off the full loan.
Changes over Time
When endowment mortgages first became popular, interest was high and
homeowners got tax relief on the premiums paid to an endowment.
Thus, the mortgage plans became attractive options for paying off a
home loan. If the endowment grew to more than the loan amount,
homeowners could spend the excess on anything they liked.
Unfortunately that rosy ideal has rarely become reality. Homeowners
no longer get tax relief on their endowment premiums and today's
interest rates have fallen. Many endowment holders now find that
their endowments won't cover the full amount of their loans.
Further, only one in three endowments will reach maturity. The
others are cashed in early with those homeowners receiving less than
what they paid in.
Current Holders Seek Advice
Those who hold endowments should seek professional financial advice
if they have concerns about the endowment's ability to pay off their
loan. Generally it's suggested that they pay an additional
contribution every month so as to cover the expected shortfall. But
there are also other options available. For example, one could pay
that contribution into an Individual Savings Account and use its
growth to cover the shortfall when the endowment matures. But that
still contains risk, partly what led us to this point. Homeowners
may also consider cancellation, though they'll likely incur
penalties and lose their terminal bonus. A financial adviser can
take homeowners through the range of options.