Endowment policies

Endowment policies have been given a bad press recently - but what are they and why have they been in the papers?

  • What's an endowment policy?
  • How do I know if my endowment is on track to pay off my mortgage?
  • Where can I get more information?

What's an endowment policy?
An endowment policy is often used to pay off an interest-only mortgage. There are two parts to it - an investment part and a life cover part - and it lasts for a set time.

If you die during the policy, it pays off your mortgage debt. If you live until the policy ends, the investment part should give you enough to repay your mortgage, but this is not guaranteed.

Recently, some people have found that their endowment policy is not on track to provide enough to pay off their mortgage debt at the end of the term, and have had to think of alternative ways to make up the shortfall. As a result endowment policies are far less popular, and many lenders no longer sell them.

Key pros and cons of endowment policies

Pros

  • If the endowment policy performs well it could give you enough to pay off your mortgage and give you some spare cash for a nest egg.

    Cons

  • If the endowment policy does not perform well it could leave you with insufficient money to repay your mortgage at the end of the term.
  • They are expensive forms of investment. If you have an endowment policy, remember it will only repay the sum assured if you die, so you may want to buy extra life cover to provide for other debts you may have. Also remember that, when the endowment policy finishes, so does your life insurance cover.

    How do I know if my endowment is on track to pay off my mortgage?

    Speakto your endowment provider. If it seems your endowment policy is not on track to pay off your mortgage, you should speak to an Independent Financial Adviser (IFA). You'll find details of your local IFA in Yellow Pages (www.yell.co.uk), or visit www.unbiased.co.uk.

    Where can I get more information? The Financial Services Authority is in charge of dealing with complaints about endowments. It is also responsible for getting compensation for anyone who thinks they may have been wrongly sold an endowment mortgage. Visit www.fsa.gov.uk/consumer for a factsheet on endowment mortgage complaints, and how to decide what action to take.