Endowment policies have been around for a long time. They are governed by the Insurance Act and are available from assurance companies only. Endowments are available for recurring premium as well as lump-sum premium investments. Endowment has fallen a little out of favour in recent years, mainly because of a lack of transparency in terms of cost and performance when compared with investments like unit trusts. Endowments are essentially pure investment policies, although life and disability benefits can be added if required. These funds are invested in an underlying portfolio, and a wide range of portfolio options which differ from company to company are available.
There are variations in the types of endowment available, and the differences are outlined below:
Smoothed-bonus portfolios aim to minimise the extremes in year-to-year returns. In the good years the fund manager keeps some of the growth in reserve, which can be called upon in bad years. The growth comes in the form of bonuses that are declared annually by the assurance company. In addition, these portfolios carry guarantees so that at the end of the contract term the investor will receive an absolute minimum of the original capital plus growth of 4.25% per annum.
Unlike smooth bonus portfolios, market portfolios do not offer any level of guarantee. Some assurance companies do, however, ensure that profits earned in any particular year are ‘locked in’ and that only the current year’s profits are at risk. Market portfolios include all sorts of options ranging pure equity portfolios to conservative portfolios.
In addition to the above portfolios there are also portfolios such as property portfolios and small company portfolios. In order to compete with the unit trust industry, more and more portfolio choices are being made available. There is now also the option of linking one’s endowment to unit trusts.
Endowment policies were one of the first few investment vehicles that were able to invest offshore after the partial lifting of exchange controls in 1995. In the same manner as offshore unit trusts, these portfolios can invest money in foreign markets. Although the portfolio is invested in foreign assets during the period of the investment, it is converted to rands at maturity.
With these policies, a quote is obtained at the time of investing and a maturity amount is guaranteed at the end of the period. This amount cannot be more or less than quoted, regardless of market conditions. Generally, the effective rate at the time of quotation is affected by prevailing interest rates – the higher the interest rates at the time, the higher the maturity value. These investments offer the least risk of all and are one of the very few investments that guarantees not only capital invested, but growth as well.
This investment vehicle is sometimes also known as a second-hand policy. The principal difference with the other endowments is that these are portfolios that have already run for five years. In terms of current income tax legislation, any endowment policy, which has run for five years, is not restricted in the number of loans or part surrenders the holder can exercise on the policy. The holder can therefore withdraw capital form the policy as and when needed in order to cover living expenses. Generally the minimum amount required for a single-premium endowment policy is R10 000.