Get a life (insurance policy) – before it’s too late (5)
IF YOU THOUGHT life insurance was just about protecting your loved ones financially when you die (although that’s very important, of course) think again.
Endowment life insurance not only provides the protection described above, it also allows you to save for the future in a long-term way. There are two main types – with-profits and unit-linked – and these describe the method by which they accumulate value from gains (hopefully) in the stock market.
The terms are not too difficult and pretty much describe what they do. With-profits means your life insurance premium is pooled with others and invested by the life insurance firm in stocks and shares, and a variety of other assets like bonds (company or government loans that pay interest), cash and property.
The returns from these investments are ‘smoothed’ over time so you are protected from the roller-coaster ride of direct investment (just look at the stock markets recently). The growth in the value of your investments is paid as regular and final bonuses but, being risk-based, there are no guarantees of the final value (known as the maturity) of the policy.
Unit-linked endowment life insurance policies do not guarantee a final sum, except the amount paid out if you die. The life insurance company invests your premiums in funds that you choose and what you get at the end depends entirely on how those funds have performed – so it literally pays dividends to choose the right one.
Potentially, you could be quids in with a unit-linked endowment life insurance policy – more so than with a with-profits plan – but there is always the chance that your final payout could be lower. That’s the risk you take with investing.
There’s one more thing about endowment life insurance. The word ‘endowment’ itself has acquired negative connotations in the wake of their alleged mis-selling in the late ’80s and early ’90s to run alongside interest-only mortgages.
The idea was that the proceeds of endowments would not only pay off the capital amount owing on such a homeloan but they would subsidise a life of finery and frivolity into the bargain. For some people this was exactly what they did; for others the champagne went flat as ‘bear’ runs (bad investment patches) on the stock markets meant the policies did not return as much as predicted. Many endowment holders sought compensation as a result.
But endowments can be a useful method of saving and providing yourself with good life insurance cover, so make sure you look into your options carefully, perhaps with an independent financial adviser.
For a fuller explanation of the ins and outs of endowments and indeed of life insurance generally, go to the Association of British Insurers (ABI) at www.abi.org.uk