Low-Cost Traditional With Profits Endowment
In recent decades, 'low cost' endowments became more common than full-cost endowments.
This popularity was mainly due to a low-cost endowment being substantially cheaper (hence the title) than the original 'full-cost' (as it became known) endowment.
A low-cost endowment continued to guarantee that there would be a minimum sum assured, sufficient to repay the whole mortgage, paid out on death (or critical illness, if the policy has it).
(The guaranteed death benefit was provided by a combination of the basic sum assured, together with annual bonuses and term assurance, which reduced as the annual bonuses were declared.)
However, the absolute guarantee, provided by a full-cost endowment, that the maturity payout would not be lower than the guaranteed death benefit, was not provided by a low-cost endowment.
Instead, the low-cost endowment relied upon a combination of a smaller 'basic sum assured' (which was still guaranteed to be paid out upon maturity) and bonuses.
There are two types of bonus, annual bonuses (also known as reversionary bonuses) and a terminal bonus.
The annual bonus is declared as a percentage of the basic sum assured. There is no advance guarantee that any annual bonus will be declared, however, once declared, it is then guaranteed to be paid out at the maturity date.
As with the full-cost endowment, there is no guarantee that a terminal bonus will be paid. The endowment provider will decide in the year the policy matures whether or not to pay a terminal bonus, and if so, how much.
In recent years, many endowment providers (particularly those whose with profit funds are closed to new business) have unfortunately declared either a very low annual bonus or even no bonus at all.
This increases the reliance upon the terminal bonus, which has no guarantee of being paid at all.
There is also a variant of the low-cost endowment, known as a 'low-start' low-cost endowment. This type of endowment had very low premiums in the early years of the policy, which were stepped-up over the first few years (usually over 5 years) until the premiums reached the higher long-term rate.
