- Endowment policy
An endowment policy is a
life insurancecontract designed to pay a lump sum after a specified term (on its 'maturity') or on earlier death. Typical maturities are ten, fifteen or twenty years up to a certain age limit. Some policies also pay out in the case of critical illness.
Endowments can be cashed in early (or 'surrendered') and the holder then receives the surrender value which is determined by the insurance company depending on how long the policy has been running and how much has been paid in to it.
Traditional With Profits Endowments
There is an amount guaranteed to be paid out called the sum assured and this can be increased on the basis of investment performance through the addition of periodic (for example annual) bonuses. Regular bonuses (sometimes referred to as reversionary bonuses) are guaranteed at maturity and a further non-guaranteed bonus may be paid at the end known as a terminal bonus During adverse investment conditions, the encashment value or surrender value may be reduced by a 'Market Value Reduction' or MVR (It is sometime referred to as a market value adjustment but this is a term in decline through pressure from the Financial Services Authority to use clearer terms) The ides of such a measure is to protect the investors who remain in the fund from others withdrawing funds with notional values that are, or risk being, in excees of the value of underlying assets at a time when stock markets are low. If an MVA applies an early surredner would be reduced according to the policies adopted by the funds managers at the time.
Unit-linked endowments are investments where the premium is invested in units of a unitised insurance fund. Units are encashed to cover the cost of the life assurance. Policyholders can often choose which funds their premiums are invested in and in what proportion. Unit prices are published on a regular basis and the encashment value of the policy is the current value of the units. This is the simplest definition.
A full endowment is a with-profits endowment where the basic sum assured is equal to the death benefit at start of policy and, assuming growth the final payout would be much higher than the sum assured
Low cost endowment (LCE)
A low cost endowment is a combination of: an endowment where an estimated future growth rate will meet a target amount and a decreasing life insurance element to ensure that the target amount will be paid out as a minimum if death occurs (or a critical illness is diagnosed if included).
The main purpose of a low cost endowment has been for endowment mortgages to pay off interest only mortgage at maturity or earlier death in favour of full endowment with the required premium would be much higher.
Traded endowment policies (TEPs) or second hand endowment policies (SHEPs) are traditional with-profits endowments that have been sold to a new owner part way through their term. The TEP market enables buyers (investors) to buy unwanted endowment policies for more than the surrender value offered by the insurance company. Investors will pay more than the surrender value because the policy has greater value if it is kept in force than if it is terminated early. In the UK, this trade is partially governed by a trade body,
The Association of Policy Market Makers.
When a policy is sold, all beneficial rights on the policy are transferred to the new owner. The new owner takes on responsibility for future premium payments and collects the maturity value when the policy matures or the death benefit when the original life assured dies. Policyholders who sell their policies, no longer benefit from the life cover and should consider whether to take out alternative cover.
The TEP market deals exclusively with Traditional With Profits policies. The easiest way of determining whether an endowment policy is in this category is to check to see whether an it mentions units, indicating it is a Unitised With Profits or Unit Linked policy, if bonuses are in sterling and there is no mention of units then it is probably a traditional With Profits. The other types of policies - “Unit Linked” and “Unitised With Profits” have a performance factor which is dependent directly on current investment market conditions. These are not tradable as the guarantees on the policy are much lower and there is no gap between the surrender value and the market value.
Modified endowments (U.S.)
Modified endowments were created in the [http://library.soa.org/library/pasg/SPG9006UST.pdf. Technical Corrections Act of 1988] (H.R 4333, S. 2238) in response to single-premium life (endowments) being used as tax shelters. They are contracts with fewer than 7-level annual premiums, and are subject to more stringent tax regulations (tax code 7702, 7702A). They are also subject to IRA-like annuity rules (such as penalties for pre-death proceeds before age 59½). If a life insurance policy is changed and then fits the seven-pay rules, it may then be redefined as a modified endowment.
Unitised insurance funds
Collective investment schemes
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Look at other dictionaries:
endowment policy — UK US noun [countable] [singular endowment policy plural endowment policies] a type of insurance policy that you pay money to for an agreed period. At the end of this time, the money that you have invested is used for paying a large amount of… … Useful english dictionary
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endowment policy — ☆ endowment policy n. an insurance policy by which a stated amount is paid to the insured after the period of time specified in the contract, or to the beneficiaries in case the insured dies within the time specified … English World dictionary
endowment policy — A policy which combines investment with insurance and runs for a specific period. It builds up a cash value, generally on either a with profit or with unit linked basis and is paid out at the end of the policy term or when you die (whichever is… … Financial and business terms
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endowment policy — noun a life assurance savings scheme designed to pay out a lump sum when the policy matures See Also: endowment linked mortage … Wiktionary
endowment policy — /ɪn daυmənt ˌpɒlɪsi/ noun same as endowment assurance … Dictionary of banking and finance
endowment policy — en dowment .policy n BrE technical an insurance arrangement that pays you a sum of money after an agreed period of time … Dictionary of contemporary English
endowment policy — noun (C) technical an insurance arrangement that pays you an agreed sum of money after a period of time … Longman dictionary of contemporary English
Endowment selling — is the practice in the United Kingdom of selling an endowment policy to a third party. This is often an attempt to gain more money than the value given when surrendering the policy to the original life assurance company.BackgroundWith profits… … Wikipedia