Endowment assurance policies - strictly, ’life or
endowment policies’ - secure payment of a capital sum if the
assured life survives a specified term, or on earlier death or
disability. They may be with- or without-profits, see
IPTM1410, or unit-linked, see
IPTM1400. They have been commonly used
in connection with property mortgages.
Typically the borrower takes out a loan and pays interest on it plus premiums to a qualifying mortgage endowment policy. On maturity, the capital sum payable on the policy is intended to pay off the loan and perhaps provide an additional benefit.
If the policy is largely invested in equities, these arrangements amount to borrowing to benefit from the acquisition of shares, on the assumption that the returns on these - dividends and capital gains - will exceed the interest payable on the loan plus administrative charges. There is therefore a degree of risk that is absent from repayment mortgages and this was not always clear to the borrower. Problems became acute in the bear market which followed the bursting of the dot.com bubble in December 1999, though allegations of mis-selling were already common and many cases had been referred to the Financial Ombudsman Service.
This state of affairs created significant tax problems, in two main categories
Not all endowment policies are affected. Some non-profit
policies guarantee to pay off the loan.
Pure endowment policies, which pay out only if the life assured survives the specified term, also exist and are sometimes used in conjunction with inheritance tax planning, see IHTM20103.
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