Traded Endowments
A lot has been written about endowments over the last couple of years, much of which stokes up the impression that they are something to be steered well clear of. Many people do just that, without really knowing what they are or how they are used.

This section contains some useful information about endowments and their use and introduces the concept of selling your endowment policy as a potentially cost-effective alternative to surrendering it prematurely.

What are endowments?
Endowments are unusual products that combine a savings element with life assurance. Their most common use is as an investment product to accompany an interest only mortgage. With any interest-only mortgage, you pay interest on the full amount of the capital for the entire duration of the loan term.

Each month, you would normally pay money into some form of investment product which will eventually accumulate enough to pay of the mortgage loan at the end of the term. An endowment is one such investment product, though it is a little more complicated than a simple investment fund such as an ISA or pension. Life office investments are widely spread across all sectors, with real assets such as equities and property usually representing around 70% of the total fund value.

The reason for this complication is that some of the monthly premium is also used to pay for a life assurance policy with a sum assured equal to the value of the mortgage loan. This is designed to ensure that the full amount of the loan is repaid if you don't make it to the end of the repayment term. Life assurance is an integral part of the endowment product, not an optional extra and you cannot have an endowment without the life assurance element. The life assurance element of your monthly payment is usually only quite small, with the bulk of your repayment providing funds for the life company to invest for the term of the contract.

Further complications are added by the fact that there are various different types of endowment each with slightly different workings and methods of growth. Follow the links at the top of the page to read brief summaries of the main ones.

Repayment Term
With an endowment policy, the length of the repayment term is fixed and cannot usually be altered. You can take the endowment with you if you move to a new home, though you may need to top up the payments if you add additional borrowing to your mortgage. You can keep on raising the amount you pay into it each time you trade up to a more expensive house. You are not usually required to show any further evidence of health to increase the cover on the life assurance element of the endowment.

Waiver Of Premium
Another useful facility, that can generally be arranged as part of any endowment, is a waiver of premium. This is the option to have your premiums paid by the life office in the event that you cannot work because of illness or accident. It works very much like an income protection policy. This does not come as standard with an endowment and costs extra.

Costs and charges
There are higher set up costs, charges, administration costs and commission payments in the early years than there are with repayment mortgages. These are hidden within the monthly premiums. You should always find out what the charges are and check past performance, not forgetting that this will not necessarily be any guide to future investment performance.