IPTM2040 | Qualifying policies and life assurance premium relief: mortgage endowments

Endowment policies

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, or unit-linked. 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 the payment of premiums 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.

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.