Topic 21: Using endowment policies for mortgage repayment Flashcards
What is a with-profits endowment?
Premiums are invested in a single fund with a relatively conservative investment approach, and the firm deducts expenses, future liabilities and contingency reserves from the fund at the end of the year. The balance of the fund, and possibly some of the reserves, may then be used to declare bonuses but they are not guaranteed. The value of the plan is unlikely to reflect the value of the underlying assets in the fund.
What is Guaranteed sum assured (GSA)?
A minimum amount that will be paid on maturity or earlier death of the insured during the term.
What is Reversionary bonus?
May be added to a with-profits policy at the end of each year, but is not guaranteed to be paid. Usually calculated as a percentage of the guaranteed sum assured, which may include accrued bonuses. Once added to the policy it can’t be taken away as long as the plan runs to maturity.
What is Terminal bonus?
A with-profits policy bonus paid on maturity or death during the term. Calculated as a percentage of the final plan value, varies from year to year and is not guaranteed to be paid.
What is Endowment?
A life assurance policy primarily intended as a mortgage repayment vehicle to run alongside an interest-only mortgage. Includes investment targeted at paying off the mortgage at the end of the term, and life assurance to pay off the mortgage on death during the term. Subject to the policy meeting certain criteria, maturity and death benefits are free from tax.
What is a Full with-profit endowment?
An endowment with a guaranteed sum assured equal to the mortgage amount, so that the minimum maturity benefit will be equal to the amount borrowed. Bonuses will increase the maturity value or death benefit to a figure in excess of the mortgage. Relatively expensive and rarely used.
What is a Low-cost with-profits endowment?
Has a guaranteed sum assured typically equal to 50–60% of the mortgage. The insurer makes an assumption that reversionary bonuses will be added at a certain rate, which will increase the maturity value to the mortgage amount. If actual bonuses don’t match the assumptions, there will be a shortfall. The guaranteed death benefit equals the mortgage amount, and comprises the guaranteed sum assured plus accrued bonuses, topped up by a form of decreasing term insurance to match the mortgage amount.
What is Unit linking?
The investor has a range of unit-linked funds to choose from. Each premium buys units in the fund, and each unit represents an equal proportion of the fund’s value. The policy value equals the number of units held multiplied by the value of each unit, so directly reflects the value of the underlying assets. Unit values are not guaranteed and can go up and down. Unit linking offers potentially higher growth than with-profits but no guarantees, so is considered riskier.
What is Offer price?
The price at which a unit-linked policyholder’s premiums buy units.
What is Bid price?
The price the unit-linked policyholder will receive when cashing in units.
What is Unit-linked endowment?
Provides a guaranteed death benefit. The insurer sets a premium to meet the target mortgage amount based on assumptions about fund growth, expenses and life assurance costs. If real performance proves worse than assumed, there could be a shortfall at the term’s end, and vice versa. Each premium buys units in the fund, with a proportion of units cashed in every month to cover costs. There is more flexibility than a with-profits plan to change premiums or cash in early. The guaranteed death benefit comprises the value of units at death plus a top-up of variable term assurance.
What is a Unitised with-profits endowment?
The policyholder buys units in a with-profits fund. Unit value is set when they are purchased and cannot go down. When bonuses are declared, they are either added to units to increase the value or they buy more units in the with-profits fund. Once added, bonuses cannot be taken away as long as the plan runs to maturity.
An endowment policy, whether with‑profit or unit‑linked, comprises two elements?
- Life assurance
- An investment element
What is Smoothing?
Creating a reserve in years of good fund growth rather than paying all the growth out in bonuses, so that in poorer years it may still be possible
to pay a bonus.
