Unit 6:21 Endowments

Question 1

Endowment Policy Fundamentals

Answer 1

• Investment product requiring regular contributions with built-in life insurance protection
• Dual-purpose: Investment component grows funds while life insurance provides protection
• Term typically matches mortgage duration (usually 25 years)
• At maturity, accumulated investment value used to repay outstanding mortgage balance

Question 2

Sum Assured

Answer 2

What a Pay-out amount is called in CEMAP

Question 3

Endowment Policy Components

Answer 3

• Comprises two key elements: Investment element and Life insurance element
• Death benefit: If policyholder dies during term, sum assured is paid out
• Maturity benefit: If policy runs full term, accumulated investment value is paid out
• Dual protection: Provides both investment growth and life insurance coverage

Question 4

Variable Term Insurance in Endowments

Answer 4

• Insurance coverage automatically adjusts inversely to investment performance
• When investment value increases, insurance coverage decreases
• When investment value decreases, insurance coverage increases
• Total protection always equals mortgage amount (investment + insurance = mortgage value)

Question 5

Non-Profit Endowments

Answer 5

• Fixed pay-out amount (sum assured) guaranteed at end of term or upon death
• No gain in investment bonuses regardless of market performance
• Now rarely offered; functions similarly to a traditional savings account

Question 6

Full With-Profits Endowment
(GSA)

Answer 6

• Combines fixed pay-out amount (sum assured) with potential investment bonuses
• This WILL pay off your mortgage at the end
• “With-profits” refers to bonus payments you get when endowment company makes investment profits
• Higher premiums compared to non-profit policies due to bonus potential
• Bonuses added to policy increase fund value over time, potentially exceeding original target amount

Question 7

Low-Cost With-Profit Endowment

Answer 7

• Death benefit covers full mortgage amount if policyholder dies
• Sum assured is less than mortgage amount, creating potential shortfall
• No guarantee of full mortgage repayment at maturity
• Success depends on investment performances for mortgage repayment

Question 8

Unit-Linked Endowment

Answer 8

• Premium payments (minus expenses) purchase units in investment funds chosen by policyholder
• Policy value directly determined by performance of underlying investment units
• Higher risk but potential for greater returns compared to with-profit policies
• Regular performance reviews monitor progress, allowing early mortgage repayment if investments perform well
• Original loan will be paid on death
• NO BONUSES ARE PAID IN

Question 9

Unitised With-Profits Endowments
(GSA)

Answer 9

• Premiums purchase units in fund, similar to unit-linked policies
• Key difference: Unit prices increase through addition of bonuses (reversionary) that cannot be taken away
• Downside protection: Unit prices cannot fall, creating guaranteed minimum value
• Value guarantee applies if policy held until death or maturity

Question 10

Unitised With-Profits Fund Types
(GSA)

Answer 10

• Variable Units: Unit value increases with bonuses; unit price cannot fall once bonuses added
• Fixed Units: Unit value stays constant; bonuses added as additional units instead
• Both methods protect against investment losses
• Both deliver guaranteed minimum value at maturity or death

Question 11

Endowment Bonus Types

Answer 11

• Reversionary Bonus: Declared annually and permanently allocated to policy; cannot be removed once added
• Terminal Bonus: Added only at death or maturity claim; not guaranteed until point of claim
• Bonus structure: Reversionary bonuses build guaranteed value over time while terminal bonus potentially enhances final pay-out
• Different security levels: Reversionary bonuses provide certainty while terminal bonus depends on final performance

Question 12

Policy Surrender Considerations

Answer 12

• Early surrender (cashing in before maturity) only returns policy’s current value
• Market Value Reduction (MVR) applies to surrendered policies
• Guaranteed value only applies at maturity or death
• Early exit likely results in reduced returns

Question 13

Endowment Policies & Qualifying Rules

Answer 13

• Must have a minimum term 10 years
• Maximum annual premium £3600 per person (£7200 for joint policies)
• Early surrender may lead to poor returns
• Tax-free maturity payout if rules are followed