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One popular use of endowment policies is in connection with private education. The rise in school fees in recent years has marched along with inflation, and few parents can now afford fees for more than one child out of current income. Increasingly, therefore, advance provision through the use of endowments is made to ensure that funds will be available during the school years.

The normal way is for the parent(s) to take out a policy or series of policies on their own life or lives, taking loans against the surrender value for any fees required in the first 10 years and meeting fees thereafter from the successive maturity values of a series of small policies.

Versatile Endowment Policy Example 11

Mr and Mrs Darrell are determined to provide their son with a good private education. As soon as he is born they decide to take out a plan to provide £111,500 a year over the five years when he is between the ages of 13 and 17. The plan involves five policies, all with-profit endowments on Mr Darrell's life. Each is a dated policy maturing respectively after 13, 14, 15, 16 and 17 years.

The sum assured on the first is £1850, on the second £1800, on the third £1780, on the fourth £1750 and on the fifth £1725. The annual premiums for the first 13 years total £1300 gross, £1247.50 net, and the total net outlay in premiums is £13,714. Each maturing policy will produce, on current reversionary bonus rates, £111,500.

Provided terminal bonus also continues this will add about another £11150 to the proceeds of each policy. Thus, the net outlay of £13,744 has produced sums totalling £17,500 for fees plus another £1750 (terminal bonus) which will go some way to meeting inflation.

The 50% saving effected here results from the very long period for accumulation. The shorter this deferred period, the lower the saving will be, but even over a few years it may still be worthwhile. Making useful provision over a shorter period also necessarily involves a larger annual investment. Over very short periods such as one to four years, life insurance can be of little help, though those with large incomes may still derive some benefit from investing for fees payable later in the child's life.

Even if private education is not being considered, thought should be given to the costs of a course at university. The parental contribution required from those with more than modest incomes is now substantial.

The assessed maintenance contribution can impose a large demand on the parents' net income. Advance provision through endowment policies can reduce this burden.

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Paid-up Policies

A further alternative is to make the policy paid-up, in which case no more premiums are payable and the company keeps the policy in force. However, there could be a taxable "chargeable event" on eventual claim. The sum assured is reduced, normally by the "proportionate" method. This means that the new sum assured bears roughly the same relation to the original one as the number of premiums actually paid bears to those payable under the original policy.

Thus, having paid five premiums on a policy requiring the payment of ten, Mr Drake should expect a paid-up value of about five-tenths... see: Paid-up Policies

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