Endowment Policies

An endowment policy is, just as the name suggests, an insurance policy, which is governed by the Long-Term Insurance Act.

Therefore, whilst it is an option for those looking to invest or save, it is not an investment or savings product. Notwithstanding this fact, however, endowment policies are, in most part, sold as investment solutions and savings products, utilising the term investment as opposed to the policy, without any emphasis on the fact that they are actually life assurance policies.

It may appear to be a fine technical issue, but it has significant implications since this description results in the avoidance of how these life assurance products are structured and the various layers of costs involved.

As a result, when an endowment policy is sold as an investment, the discussion turns from the

characteristics of the product to focus more on aspects such as investment horizon and illustrative returns etc. Whilst endowment policies have a place within the financial planning environment; they are not always suitable recommendations to the average client who is looking to invest funds for wealth creation or to save for a specific objective.

The categorisation of an endowment policy as a life assurance policies means that in addition to surrender fees and penalties, there are additional consequences to the restriction period. In accordance with prevailing legislation, the minimum restriction period applicable to an endowment policy is five years.

During this five-year restriction period, the insurance company may not allow an investor to either fully surrender the policy or to borrow the full investment value. Furthermore, in the event of the investor increasing the monthly or annual contributions by more than 20% of the previous year’s contributions, a new five-year restriction period will be applied. This means that a five-year term endowment policy could effectively become an eight or nine-year term policy by one merely increasing one’s premium in excess of what is allowed.

These restrictions involved in investing in an endowment policy, especially with regards to the liquidity and penalties, are not always adequately disclosed to potential clients to allow them to make an informed decision as to the policies’ suitability to their needs and circumstances.