Appropriately managing your finances is essential for stability and a prosperous professional and personal life. With many large expenses potentially arising in your future – from mortgages and property investments, to education fees and business investments – you must recognise ways that you can make your money go further.
Endowment policies are one potential solution to help stretch your earnings over time. Once a popular investment vehicle, especially for individuals in the mid-1980s to 1990s, they offered a way to pay off a large debt, like a mortgage, and receive a substantial additional sum after its term had concluded. However, times have changed, and economic conditions have changed considerably since then.[i]
This isn’t to say that endowment policies are to be avoided. In the right situations they may be fruitful investments, helping you achieve greater financial accomplishments later on in life. Understanding how they work, why they went out of fashion, and what dental professionals need to look out for to best protect their own interests is essential.
Endowment policies of the past
An endowment policy may appear, at first, like a simple life insurance policy. You pay premiums into the policy for a set amount of time – typically 10 years or longer – and insure yourself as you do so. However, over the policy’s term, the value of the saved sum grows and can exceed the value of the premiums paid into it. Considering this, many people look at it as a savings plan alongside a life insurance policy.
In the height of their popularity, endowment policies were used as a way to finance mortgages. To illustrate their prevalence, in 1988 83% of new mortgages were endowment linked. By mid-2000, this had dropped to just 23%.[ii] What changed? One factor is the inflation rates of the time.
In the years 1980, 1985 and 1990, inflation sat at an annual average rate of 16%, 17% and 14% respectively. By 1995, 2000, and 2005, when endowment policies dropped in popularity, average annual inflation rates shrank to 8%, 6% and 4%. Consumers of the ‘80s were effectively being sold endowment policies with the promise of nominal growth at 18%-20%, but when inflation rates depleted, the returns collapsed proportionally.ii Some felt they had been mis-sold the policies, with advisers not clearly disclosing the risk that returns may deplete (which became the reality for many), and some found themselves unable to repay their loans.[iii] Between 2002 and 2007, the Financial Ombudsman Service received more than a quarter of a million disputes about the sale of mortgage endowment policies.iii
For dental professionals reading this with scepticism regarding the merit of such a policy in 2024, there are still benefits that can help you achieve your financial goals. Today, we can operate with the benefit of hindsight, and understand the risks and rewards with more information available to us.
Endowment policies in the 2020s
Dental professionals considering an endowment policy in 2024 must understand the potential benefits and risks, as well as their own expectations. For individuals seeking reliability, endowment policies provide some assurances; as a life insurance solution, a policy can offer a payment of its face value as the insured person or a death benefit for your beneficiaries, and growth is expected over the contract term.[iv]
Since it is a time-limited solution, you could set a policy with a target end date in mind. Perhaps in 15 years’ time you intend to retire, your now-young children will be leaving school, or you wish to establish your own dental practice. Setting up an endowment policy with this foresight means you can set money aside, and reap your rewards closer to a major life event.
However, the length of an endowment policy may hamstring you by needing to procure a new life insurance policy come the end of its term. Based on your age and health status at this time, it could be expensive.
Similarly, the returns of an endowment life insurance policy, whilst beneficial, may not be overly rewarding. Other savings schemes may offer improved rates of growth. Clinicians must fully understand the potential benefits and limitations presented to them before proceeding with an endowment policy.
Seeking advice
Dental professionals should seek advice from independent financial advisers for high quality guidance. They could contact the money4dentists team, an expert group of independent financial advisers dedicated to supporting dental professionals with a range of economic needs. Organise a free consultation with money4dentists today for expert advice on endowment policies, and the team will help you assess the right investment opportunities for you.
Whilst endowment life insurance policies are not in vogue like they once were, clinicians can still consider them a reliable and beneficial investment vehicle. Before putting pen to paper on a policy, however, consider seeking advice from industry experts to find the right opportunities for you.
For more information, please call 0845 345 5060 or 0754DENTIST.
Email info@money4dentists.com or visit www.money4dentists.com
Author: Richard T Lishman, Managing Director of the 4dentists Group of companies
[i] Edmonds, T., (2015) Endowment mortgages. House of Commons Library (Online) Available at: https://commonslibrary.parliament.uk/research-briefings/sn00570/ [Accessed July 2024]
[ii] Edmonds, T., (2015) Endowment mortgages, Briefing Paper. House of Commons Library (Online) Available at: https://researchbriefings.files.parliament.uk/documents/SN00570/SN00570.pdf [Accessed July 2024]
[iii] Severn, D., (2008). The Financial Ombudsman Service and Mortgage Endowment Complaints. (Online) Available at: http://web.archive.org/web/20140327140434/http:/financial-ombudsman.org.uk/assets/pdf/DavidSevernReport.pdf [Accessed July 2024]
[iv] Lake, R., Valentine, A., (2022). The Truth About Endowment Life Insurance Policies. Forbes Advisor. (Online) Available at: https://www.forbes.com/advisor/life-insurance/endowment-life-insurance/ [Accessed July 2024]
