Versatile Endowment Policy - Example 9
Mr Crane is aged 45 and wants to retire early at 60. This will mean a lower pension from his firm than if he stayed until the normal retirement age, and so he decides to supplement it by taking out a 15-year with-profit endowment. He takes out a £16,000 sum assured policy at an annual cost of £1420 gross (£1346.5 after tax relief). Assuming that the company continues to pay the same rate of reversionary bonus, he will actually receive reversionary bonuses of £15,000 on top of the basic sum assured, and, if the company also continues to pay a terminal bonus at the current rate of 20% of attaching bonuses, this will add another £111,000, making £1112,000 in all.
If one is considering investment over a period of years, one should compare the likely results with those obtainable elsewhere. In Example 9, Mr Crane is getting a return equivalent to 7.7% p.a. However, since he gets tax relief on the premiums, his actual return (the maturity value as a return on net premiums) is almost 9.9% p.a. This, however, does not take into account the £16,000 minimum life cover maintained throughout the period, which could cost about £125 p.a. Stripping out this cost means that the investment return is over 101/2 % p.a. Of course, since you have to have the cover to have the life policy, this last calculation is somewhat artificial from the policyholder's point of view, but it does show more accurately the rate of investment return that the premiums are earning. As far as Mr Crane is concerned, his net return on money invested is almost 10% p.a., which is an attractive proposition over a 15-year period. Of course there is no guarantee that he will get the sum of £1112,000: reversionary bonus rates and terminal bonus rates may be reduced. If they are, however, it will be in response to changes in the investment scene which will also reduce the return on all other forms of saving, so that the relative advantage should remain.
As a short-term accumulator of capital, also, the endowment policy can be extremely useful.
Mr Drake is single, 35, and earning a large salary from his employer. But he wishes to start up his own business and wants to accumulate capital towards this. He takes out a 10-year with-profit endowment with a sum assured of £500,000 for an annual premium of £111,060 gross, £1874.50 net of tax relief. On current bonus rates he should receive £1115,600, which represents a net return of 10.2% on his premiums.
Table 7 Typical annual premium rates per £111,000 sum assured endowment policy over 10, 15 and 20 years.
Age Without profit With-profit
Term (years) Term (years)
10 15 20 10 15 20
£1 £1 £1 £1 £1 £1
30 82 50 33 105 70 54
50 87 55 39 110 75 60
A glance at Table 7 will quickly show that these policies are not protection-oriented. Those in search of life cover for their families will have to be very well off to be able to buy an adequate sum assured through a with-profit... see: Annual Premium Rates