Richard T Lishman: Endowment Policies – an option for you?
Richard T Lishman is the founder and CEO of the 4dentists group.
The financial options open to dental professionals are limitless, and Endowment Policies are an interesting possibility to explore. Effectively, an Endowment Policy is a type of savings plan, the most common of which are Life Assurance Endowment Policies.
These are designed to pay out a lump sum after a specific term or, sometimes, in the event of death. They are usually taken out to ensure that a mortgage on a property can be paid should the unthinkable happen, but they can also be useful as a way to save over a long period of time.
There are many different types of Endowment Policies. Non-profit policies are the most straightforward, but because they simply provide a set sum upon completion, these policies are no good if you’re looking to make excess capital.
With-profits Policies are the most beneficial option. Any funds paid into this type of plan will have a dual purpose. The first of these is to cover the cost of any Life Assurance protection included in the policy. These premiums are invested by whoever supplies the policy to increase its value over time.
Over time the value of the savings element grows until it exceeds the total sum of premiums paid and increase your capital. Sometimes this option is a better alternative than relying on interest from savings accounts, which is why it has become a popular choice for people looking to save money in the long-term.
These policies are for a set period, usually spanning from 10-25 years, and are subject to advantageous taxation rules that only apply to Life Assurance policies with terms of 10 years or more. These taxation rules are known as Qualifying Rules, and allow for any investment gains made within applicable policies to be paid to the policy holder without any personal tax deducted.
As these policies are commonly used to pay off a mortgage, the term is usually the same length as the original mortgage agreement (typically 25 years). While incredibly rare, there are Endowment Policies shorter than 10 years, however, due to this shortened timeframe, they don’t benefit from the Qualifying rules.
With-profits policies put the power of investment into the hands of the Life Assurance company. The benefit of this is that during years where high investment returns are achieved, they put some in reserve. This helps to cancel out any bad years of return, meaning the bonus on your policy is likely to be steady across the duration of the agreement.
The third type is a Unit Linked Endowment Policy. This type allows you to buy units in investment funds, putting you in charge of the unit trusts your expenses are invested in. Your income will entirely depend on the performance of these investments.
In nearly every scenario you’ll want to leave the funds invested in an Endowment Policy alone so that they can generate the best return for you. However, should you find yourself in a pinch and urgently need funds, there may be options available – though you’ll need to contact your policy provider to find out the terms and conditions.
Some Endowment Policies restrict money being drawn before the maturity date, so bear this in mind before you invest.
If you decide to sell your policy, there are a number of things to bear in mind. First, although you will no longer be considered the owner of the policy after its sale, the Life Assurance cover will continue to be based on your life. Plus, if you are to die during the terms of the policy, the new owners will be paid the proceeds – the same applies should the policy reach maturity.
Unit Linked Endowment Policies are unlikely to be sold on, so, if you have taken out one of these, surrendering the policy is probably the best way forward. Due to the way this type of policy works, it’s usual that the value of surrendering it will be similar to the investment value.