Endowment insurance
A contract paying a lump sum on a set date if the insured is alive, or earlier if the insured dies before; it combines savings with term death cover.
Endowment insurance combines two opposite covers. If the insured is alive at maturity, the insurer pays the agreed sum, like a savings contract. If the insured dies before maturity, it pays the same sum, or a similar amount, to the beneficiary, like term cover. Payment is therefore certain, only its timing varies, and the premium is high because it funds both savings and death cover. The product was long the core of European life insurance, before more flexible modern savings contracts replaced it in France. It remains present in many markets, notably in Asia, and in participating forms where the insured also receives a share of profits. The United Kingdom drew a lasting lesson from it. In the 1980s and 1990s, millions of mortgages were backed by equity-invested endowment policies meant to repay the capital when the loan matured; returns fell short of projections, many borrowers faced shortfalls, and the mis-selling scandal led to massive compensation. The episode remains a reference on the risk of a product sold on a return assumption the buyer does not understand.
A British borrower takes out a 60,000 pound interest-only mortgage in 1988, backed by an endowment policy expected to be worth at least that amount in 2013. At maturity, the policy is worth only 45,000 pounds; he obtains compensation for not being warned of the shortfall risk.
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