A low-cost endowment policy is, as the name suggests, a low-cost version of the with-profits endowment. The policy combines a with-profits endowment and decreasing term insurance. These policies were introduced as a cheaper way of covering house purchase loans, with the guaranteed death sum insured being equal to the loan.
Although the term insurance element means there is a guarantee that the loan will be repaid on death, there is no such guarantee on maturity.
The amount payable on death is the greater of:
- The basic sum insured plus any bonuses added to the policy.
- The guaranteed death sum insured.
The basic sum insured increases each year with the addition of bonuses until it overtakes the guaranteed death sum insured.
The term insurance element, which is the difference between the basic and guaranteed death sum insured, decreases as the bonuses are added and will cease once the basic sum insured exceeds the guaranteed death sum insured.