Unit-linked endowments are a type of investment where the premiums are invested into units of a fund that is unitised.

Unit-linked endowments work on a different basis to the above. When a premium is paid, the amount of the premium – minus an amount for expenses – is applied to the purchase of units in the chosen fund. These units build up over time, and at the maturity date the policyholder receives an amount equal to the total value of all units in the policy.

Units are converted into cash to cover the cost of the assurance. The policyholder is able to choose which funds their premiums are invested in, and to what proportion. The unit prices are regularly published, and the conversion value of the policy is the current value at that time.

Usually, unit-linked endowments also provide a fixed benefit sum if the policyholder dies before the end of the term. The cost of this cover is taken from the policy funds monthly by cashing in an appropriate number of units.

The plan’s value is determined by the value of the underlying units in it, which in turn depends on the investment returns produced by the fund itself. A fund manager will look after the endowment and select appropriate investments in which to invest the policyholders’ premiums. Unit-linked policies can produce higher returns than with-profits policies as this fund manager can be more daring when selecting investments. Unlike with-profits endowments, however, unit-linked policies do not provide any guaranteed minimum return at maturity, thus entailing acceptance of greater risk.

When a unit-linked endowment policy is to be used for a mortgage, the premium required is calculated as the amount sufficient to repay the mortgage at the end of the term if unit prices increase at a specified rate of growth. This rate of growth is usually set at quite a moderate level and is shown on illustrations provided at the start. Policyholders can choose which fund or funds they wish to use for their investment. Should the death of the policyholder occur before the end of the term, the full amount of the mortgage is protected. This is normally achieved by including a further variable term assurance plan which is adjustable in line with the value of the underlying units.

Your premiums buy units at the price offered in a unit-linked fund, or are split into units whereby the price increases in line with declared bonuses and doesn’t decline, or if units have been added they are not taken away. The qualifying policy is a contract. Upon the policyholder’s death the amount to be paid out is either the guaranteed insured sum or the bid value of the units, depending which is higher.

The growth rate is not guaranteed, and it is up to you as the borrower to ensure that the policy will provide sufficient funds to repay the loan at the end of the day. The company will review the progress of the policy periodically and, if necessary, inform the borrower of the need to increase the premiums (or make other provisions) should the policy not be on target. Most companies also provide a facility to switch to a cash fund, or some other similar vehicle, in order to protect the policy from sudden market dips towards the end of the term.

One possible advantage of these policies as a mortgage repayment vehicle is that, in a strongly rising market, the value of the policy may reach the desired or required amount before the end of the term. In that event, the policy can be surrendered and the loan paid off earlier, therefore saving on future interest payments.