Home → Finance →

What is an Endowment Policy?

Written by, Marija Petkova

Updated September, 13, 2022

An endowment policy is a great choice for people looking for an investment policy that includes life insurance.

But, what is an endowment policy, what are its pros and cons, and is it a good option for you?

Let’s dive in.

What is an Endowment & How Does it Work?

An endowment policy is a type of investment with life insurance that you can take out of a life insurance company and some financial institutions in the UK. 

An endowment policy in the UK, like a life insurance policy, requires regular monthly payments, called premiums, over a fixed period, which usually stretches between 10 and 25 years. At the end of the term, the insurance company pays out a lump sum to the insured or the beneficiary.

Types of Endowment Policies

Non-profit

Non-profit endowment policies in the UK have lower premiums and a static payout amount. There are no bonuses with these plans, but they are a great safety net for the family.

With-profit

With-profit endowment policies, also known as full endowments, guarantee to pay out a certain amount of funds to the beneficiary in certain circumstances. Unlike non-profit policies, full endowments’ payout isn’t static and the maturity benefit at the end of the term is often larger than the sum assured.

Unit-linked

In unit-linked endowment policies, the premiums are used to purchase investment funds. The payout sum at the end of the term depends on market performance and return of investment. 

Whole-of-life

This life endowment policy more closely resembles life insurance in that they are tied to the insurer’s death. The insurer pays a lump sum to the beneficiary or family after the death of the insured.

Selling your Endowment Policy: Pros and Cons

Policy premiums differ depending on age, sex, term, and type of endowment. In most cases, it is more profitable to see a policy to term. In case you cancel it, you automatically forfeit the insurance attached to it. 

Selling your endowment policy could potentially be a better option than cancelling. 

Pros

  • More profitable than cancelling
  • Ability to redirect the money to another investment
  • You can use the money to instantly pay off mortgage or debt

Cons

  • Loss of insurance benefits
  • You might need to settle for less than what you were hoping for
  • The process of selling is long and time-consuming 

How to Sell Your Endowment Policy

If you’re looking for a place to sell your endowment insurance policy, you might want to consider the Traded Endowment Policy (TEP) market where you can find good deals. You can get quotes from various traded endowment specialists and then compare which offer works for you.

The endowment policy type will determine its resale, meaning you might be able to sell with-profit or whole-of-life endowments, but not unit-linked endowment policies. The term of the policy may also affect whether it can be sold.

Before selling your endowment policy

  1. Retrieve your policy details such as your provider, maturity date, the policy worth or value, and the type of endowment policy you took out. 
  1. Talk to an independent financial advisor if you need any insurance and how you’d be able to manage if you decide to proceed with the sale. This is a critical step as statistics share that €146 billion worth of life insurance benefits were paid out in 2019.
  1. Reach out to your accountant to figure out if any taxes apply to the sale.
  1. Consider what you need the funds from the sale. This will help you pick the right offer.

The process of selling your endowment policy

  1. Contact the company and ask for the necessary paperwork. 
  1. Fill in the documents and send them back. 
  1. Wait for the buyer to pay for the policy.
  1. The insurance company will notify you that you no longer need to pay the premiums for that policy.

Bottom Line

Endowment policies are a great option for people who prefer risk-free investments with an insurance element to them. There are several types, some of which are more profitable than others, but they’re all long-term investments. 

 Once you figure out what is an endowment policy and how it works, you can make an informed decision about whether or not to take one out. 

My name is Marija, and I'm a financial writer at DontDisappointMe. Although finance might not be everyone's cup of tea, my 10+ years of working in one of the biggest banks in my country, and my interest in extensive research on everything finance/investment-related, have made me somewhat of an expert in the field (if I do say so myself). No longer having the passion to work in a corporate setting, I decided that I couldn't let all of this knowledge go to waste so I started writing. And, here I am! Today I try to share my knowledge with my audience in the hopes of making this topic as simple and interesting as possible. In my leisure time, I like spending time with my family and travelling to new locations.