Advantageous taxation rules apply to Life Assurance policies with terms of 10 years or more. These taxation rules (called the Qualifying rules) allow for any investment gains made within suitable policies, called Qualifying policies, to be paid to the policyholder without any personal tax being deducted.  Although it is possible for policies to have terms of less than 10 years, Endowment Policies are Life Assurance policies therefore a term for the policy must be established at outset.  The majority of Endowments sold in the UK have traditionally been used as mortgage repayment vehicles, and so the term of these policies would normally be the same term as the owner's original mortgage term (frequently 25 years).

‘With Profits’ Policies.
Where policy premiums are invested will differ in accordance with the policy type. The majority of policies are 'With Profits' where the policy premiums are invested in the ‘With Profits’ fund of a Life Assurance company.  Under these policies the Life Assurance Company makes all the investment decisions.  They utilise any investment profits gained to provide bonuses, which are added to the policy, normally on an annual basis, to increase the policy's value.  The amounts of bonuses are added year on year at the discretion of the Life Assurance Company.

To maintain the level of bonuses during years of less attractive investment gains, profits are often held in reserve by Life assurance Companies in years of high investment returns and not distributed as bonuses.  In the past, this smoothing of investment returns has proved popular with savers.  However, more recently ‘With Profits’ type investments have seen a series of reductions in bonuses generated by the reduction in the investment returns during the late 1990’s, which has had an effect on the build up of investment reserves accumulated during years of generous investment profits.

‘With Profits’ Investment
The term 'With Profits' refers to a form of investment available from Life Assurance products whereby the policy shares in the profits generated by the Life Assurance company on the money invested in the 'With Profits' fund. This investment fund contains a mixture of shares, commercial property, government loans (gilts) and loans to large businesses (corporate bonds).

A ‘With Profits’ policy grows through the addition of bonuses. These are calculated by the Life Assurance Company and take into account the investment returns made within the fund. The bonus system allows Life Assurance Companies to smooth out stock market fluctuations, this helps ‘With Profit’ Endowment policies to produce steady growth.

In the event of an early surrender in adverse market conditions, the provider may make a Market Value Reduction. This is a reduction in the amount the policy holder receives to protect the remaining policyholders from the impact of withdrawals made when the markets, and therefore the fund value is at a low point.

There are normally two types of bonus. The first is the annual (reversionary) bonus which is guaranteed and once added cannot be taken away so long as the policy is maintained to the end of its term. However most Life Assurance Companies have the right to recalculate the value of annual bonuses on cancellation of the policy before the end of its term.
In addition to the annual bonuses many ‘With Profits’ policies can also benefit from final (terminal) bonuses which are only available at the end of the policy term and are not guaranteed.

To calculate the value of any bonuses, the Life Assurance Company reflects factors such as past investment returns, future predictions of likely investment gains and an estimate of the expenses for running the investment fund. In times of strong investment gains, as opposed to paying out large bonuses, providers will accumulate profits to compensate for years when investment returns are lower. This is the smoothing effect offered by ‘With Profits investments’.

Also called Unitised. If your insurance policy is unit-linked, Your monthly premiums are used to buy units in a fund or funds run by professional managers. The value of your policy at maturity is dependent upon the growth of the fund in which the policy is invested. Like Unit Trusts the price of these units can go up and down, so the value of the Endowment can change.

At the time the policy is first created its term is established (i.e. the number of years it is expected to run). However, many endowment policies are cancelled before they reach the end of this original policy term. The Life Assurance Company closes the policy, stops the collection of premiums and makes a cash payment to the owner based on the policy's value. This process is known as surrendering the policy.
It is not generally recommended to surrender a policy early, as endowment policies are normally established as long term savings (or mortgage repayment) plans, the money invested in them may not be immediately available. You should contact the policy provider for details of what is available from your plan.
Although the process can be relatively simple, the true impact of surrendering should be considered carefully before you decide to take this approach. The manner in which the charges are collected under Life Assurance policies often means that the values available on early surrender can be very small by comparison to actual premiums paid and the investment returns achieved.
The charges under a life assurance policy are normally spaced out throughout the whole of the expected term (e.g. 25 years). Should a policy be cancelled before the end of its term, most Life Assurance companies recoup their expenses from the amount available at the time of surrender.

The terms of the policy may prohibit withdrawal of funds from the policy prior to the end of its established term (maturity date). There are however instances where you access to some money may be available by electing for one of following:

1. Take a loan from the Life Assurance Company based upon the value of your policy.
2. Surrender all or part of the policy by arranging for the policy to be closed before the end of its normal term.
3. Sell your policy to someone else

In the event of early surrender in adverse market condition the provider may make a Market Value Reduction. This is a reduction in the amount received to protect the remaining policyholders from the impact of withdrawals made when the markets, and therefore the fund value, is at a low point.

1. Loans against the value of a policy

Some Endowment Policies contain an option that allows the owner to take a small loan from the Life Assurance Company holding the endowment. The amount of any loan available would be calculated by the company and based on the policy’s value.  Any loan taken would normally be repaid at the end of the policy term from the maturity proceeds. If a loan is available interest will be required to be paid on the loan amount until it is repaid.  It will be expected that the policy is maintained throughout the period the loan is outstanding.  In recent years the number of Life Assurance Companies offering such loan facilities has reduced sharply. It is unlikely that any loan facility will be available on Unit Linked policies.

1. Surrendering the whole or part of a policy

Under the tax rules that govern the majority of Life Assurance policies it is not possible to surrender part of a policy, therefore it is likely that the entire policy will have to be surrendered. This means benefit from the Life Assurance cover held within a policy will cease.  This aspect of surrender should be considered carefully if a policy has been held for a considerable time and the policy holder’s health is not what it was when it was first effected.
There are certain types of endowment plans that contain an alternative to surrendering the whole policy. Under these plans benefits may be drawn from a part of the plan whilst maintaining the rest of the plan. These plans work by the Life Assurance Company clustering together a series of small identical policies.  This clustered policy approach enables withdrawal of money from some of the policies, either because they have reached the end of the original term or alternatively by choosing to surrender them. Payment of the future premiums on the policies that continue will need to be made.

For details of whether your policy is clustered you may wish to refer to the original policy documents or to contact your Life Assurance Company. Alternatively – please contact us for assistance.

Most endowment policies are subject to special tax rules known as the ‘Qualifying Rules’. Under these rules where premiums have been paid to the policy for a period of 10 years or more then any ‘gains’ you make from the policy are free of tax.

The ‘gain’ in a policy is the difference between the amount you receive on surrender and the total premiums paid since the policy’s start.

Where a policy has been running for less than 10 years and has not been maintained for a period greater than 75% of its original term, there is the possibility that any ‘gains’ made within the policy could be subject to tax. If you fall into this category you should seek advice on the taxation position. You can contact us for assistance by clicking the ‘Make contact now’ button shown on the right.

1. Selling an Endowment Policy

The amount available from a Life Assurance Company on the surrender of an endowment policy has to take into account a number of different considerations. These include the expenses that would be collected over the policy term, investment conditions that prevail at the time of surrender and those that have occurred over the period the policy has been held.

If a policy is sold, the circumstances are different.  The policy is continued by the new owners, which allows the Life Assurance Company to collect their charges in the normal way. The price offered by the purchaser normally reflects the ongoing investment opportunities for them and the fact that a high proportion of the policy charges have already been paid.

Accordingly the amount the purchaser may be willing to offer to buy a policy, rather than surrender it to the Life Assurance Company, could be significantly higher than the value available on surrender of the policy.

If a policy is sold then the ownership is transferred to a ‘grantee’ even though the Life Assurance cover will continue to be based the original life assured.

It is possible to change the legal owner of an Endowment Policy and for the policy to continue totally unaffected by this change. This process is known as ‘assignment’.

If a policy is sold and it is assigned to new owners and the original owner (life assured) should die during the term of the policy, the proceeds of the policy are paid to these new owners. Also when the policy reaches the end of its term, the value on maturity will be paid to the new owners.

Although it is possible to assign most types of Life Assurance policy, not all of them are attractive to the investors that buy existing policies (known as second-hand policies). Therefore before considering the option of selling a policy the type of policy must be established.

It is unlikely that a Unit Linked Endowment policy can be sold on, and in these instances consider how much is available on surrender. The method of charging under ‘Unit Linked’ policies normally means that the value available on surrender is similar to the investment value of the policy.

it is possible that a ‘With Profits’ policy will be suitable for sale as opposed to surrender. There are businesses that specialise in arranging the purchase of ‘With Profits’ policies. These are called market makers and are often advertised in telephone directories like Yellow Pages.

A traded endowment is the name given to an endowment policy, normally a ‘With Profits’ policy, which has been sold onto another person by the original owner rather than being surrendered.

Most endowment policies are subject to special tax rules known as the ‘Qualifying Rules’. Under these rules if premiums have been paid to the policy for a period of 10 years or more, then any ‘gains’ made from the policy are free of tax.

The ‘gain’ made in a policy is the difference between the amount received from the sale of a policy and the total premiums paid since the policy’s start.

Where a policy has been running for less than 10 years and has not been maintained for a period greater than 75% of its original term, there is the possibility that any ‘gains’ made within the policy could be subject to tax.  The tax office should be contacted for further advice on this subject.

Please contact us for any advice or assistance on the above.