Endowment mortgages have been singled out for special attention because we Fools dislike them intensely! You've heard about the pensions mis-selling scandal. Well - this is another one! It has become alarmingly apparent to many householders that their endowment mortgages are unlikely to achieve the targets promised by the financial world and a considerable number are now being asked to increase their premiums to meet the expected shortfall.

Let's explain:

Endowment policies are a form of life insurance combined with a savings element. Those in search of financial Wisdom in its purest, most refined form need look no further.

First, let's hear a few comments about the life assurance industry in general from an ex-Deputy Chairman of one of the companies implicated in the pensions mis-selling scandal:

"... for the last twenty years the big life assurance companies in this country have systematically been ripping people off..."

"... the high turnover in salesmen, the commission system and the practice of front-end loading all lend weight to the accusation that there has been a massive distortion... by the life assurance companies... of the British retail savings market..."

These comments were quoted in a book entitled The Last Days of the Credit Culture by Jonathan Mantle and speak for themselves coming, as they do, from the horses 's mouth. Front end loading is simply the way the financial chaps pay themselves - they take their money up front in the early years instead of spreading it out - so smaller amounts of your money are being invested right from the very beginning. The money that they take is therefore busy compounding for them rather than for you. And as you've read Step Two of the Ten Steps To Investing Foolishly (haven't you?) you'll know that, where compound interest is concerned, the early years are vitally important.

But what about endowments specifically? Often they are sold in conjunction with interest-only mortgages as the means to repay the capital sum. This means that, as well as paying the interest on your mortgage each month, you pay into an endowment. At the end of 25 years it will, in theory, have produced enough to pay off the original amount of the loan and (hopefully) a little bit more. Of course, like any interest-only mortgage, they also run the risk that the final pay out will not be enough to pay off the loan. If the policy-holder has the misfortune to die before the end of the term, then the endowment functions as a life assurance policy and pays out a predetermined sum.

Like personal pensions, endowments tend to carry staggering penalties in terms of front-end loading, and these aren't all. In the typical case of an endowment policy costing the investor £100 per month for 25 years, only 70% of the premiums may be used to buy investment units for the first three years of the policy. Then, if these investments are made in managed unit trusts, they will still be subject to what is effectively a 5% entry charge. "Ugh!" is all we can bring ourselves to say about this. This means that it can take as much as seven years for the surrender value (i.e. what the policy is actually worth) to approach the value of the contributions paid in.

Up until 1984, there was tax relief on life assurance premiums, and thus endowments had some degree of tax efficiency. But these days, compared to ISAs, they are nothing more than wet, smelly dogs shaking themselves dry in the living room. Woof!

The conclusion if you are thinking of taking out an endowment policy is: "At all costs, don't!" If you already have one, then bad luck. If you want to get rid of it and step aside into something altogether more Foolish, then you may have some fairly complex mathematics ahead of you to calculate the pros and cons. Almost certainly, though, if you decide you want out it will pay you to sell the policy, if you can, rather than surrender it.

So, if you've already got one of these horrible things, then it might be worth reading this explanation of the different types of endowment. There is also this article which addresses the thorny issue of what to do with it and don't forget the Endowments discussion board. If you do decide to get rid of it, here's how to do it.

In summary, endowments are inflexible, high cost, underperforming investments that line the pockets of the seller at the expense of the buyer. If you want life assurance, buy just that -- "term" life assurance, no more no less, and put your money for investment into real investments, Foolish investments.

Motley Endowments Warning

The preceding comments and thoughts about endowments are intended for general consumption only. Any decisions taken by an individual about the details of his or her endowment policy, and specifically whether or not to discontinue payments into a given scheme, must not be taken lightly. It is not the Motley Fool UK's intention that people will take rash financial decisions after reading features at this site, and it remains firmly up to individuals to fully inform themselves about the details of their particular financial situation. The Motley Fool UK, therefore, will accept no responsibility for the results of any decisions taken by individuals on the basis of material obtained here. And that's that!

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