Endowment Assurance

An endowment is basically an investment policy. The premium contains all three factors - ‘protection’, ‘expenses’ and ‘investment’ but it is the investment content which makes up most of the premium.

Endowment Assurance works in roughly the same way as the Term Assurance, i.e. if death occurs within a chosen term then the lump sum is paid out. However, where the Endowment differs is that at the end of the contract, (if the client has not died), a lump sum is also paid out. Thus it is certain that at some point in time the lump sum will be paid. To fund this certain payment, the life office must invest money over the term of the policy - the portion they invest is the investment portion of the premium.

Since there is this investment element in the premium, should the policy be stopped for any reason before the end of the term, except in the case of death, then a cash payment will be made of a proportion of the investment elements paid in. This is called a surrender (or encashment value).

Should the surrender occur in the early years of the policy life, the value of it will be very small compared with what has been paid in premiums. This is so because the life office has certain expenses to meet, e.g., The cost of setting up and issuing the policy document and salary plus commission to the salesman. The life office aims to recoup these expenses by taking back a little of each premium, i.e. the expense loading.