An endowment policy is a savings and life assurance policy for an agreed period, the minimum term being 10 years. A tax free benefit is normally paid out at maturity or on earlier death.

The policyholder may sell the policy in the traded endowment market, as an alternative to surrender before the end of the term, although this must be carefully considered as financial penalties will often apply.

There are charges on all endowment policies and the Key Features document from endowment providers will explain these.

Early surrender will usually incur further charges from the provider.

Endowment policy types
Types of endowment policies include With profits, low cost, unit linked, low start, flexi endowment, and friendly society plans. Please click on the links below for more details.

If you withdraw from this type of investment in the early years you may not get back the amount invested.

With profits endowment policy
With profits endowment policies are normally enhanced with regular bonus payments. Bonuses are added to the sum assured and once added can be withdrawn at certain times. Please follow links below for more information.

Bonuses may be added annually (known as the reversionary bonus) and at the end of the term (a terminal bonus) depending on investment performance.

Low cost endowment
Low cost endowment policies were invented by insurance companies to reduce the cost of the with profits policy, and provide a means of paying back an 'interest only mortgage.'

It is a combination of a with profits endowment policy and decreasing term assurance (to ensure the capital sum borrowed is repaid in the event of death).

Bonuses are added to the endowment sum assured with the intention that there should be sufficient cover to repay ,say, a mortgage at the end of the period. Low cost endowment policies are not guaranteed and maturity levels depend on investment performance.

Low start endowment
Low start endowment policies were Introduced to help young 'first time house buyers'. Low start endowments are another type of with profits policy where bonuses are added to the endowment sum assured. The level of cover is the same as the low cost endowment, but premiums start at a lower level and then increase at a set percentage for five years. The eventual premium is higher than the level premium under a low cost endowment policy.

Unit linked endowment policies
Premiums buy units in a fund of the investor's choice. Units will be cancelled each month to buy life cover. There is investment flexibility as funds can be switched.

Units will be purchased at the offer price and sold at the bid price (usually lower) incurring a bid offer spread charge of around 5%. Set up costs will be taken off the fund value.

Flexi endowment
A policy is written say for a total term, say to the age of 65, with options to encash after 10 years without penalty. The policies are usually written in segments to allow some to be encashed and some to be continued. This may be suitable for school fees planning.

Friendly society plans
Friendly society funds enjoy favourable tax treatment and are tax -free to the investor.

Level and bases of, and reliefs from taxation are subject to change.