Endowment policies: An endowment policy is a contractual savings vehicle that offers a wide range of underlying investments with different risk profiles. The underlying investments range from those in narrow sectors of stock markets, such as technology shares, to broad-based, low-risk investments where your capital and nominal growth are guaranteed. The minimum investment period of an endowment policy is five years. The important feature of endowments is that you contract with a life assurance company to maintain your premiums at a predetermined level for a fixed period. The interest, net rental and foreign dividend growth in your policy are subject to tax of 30 percent, which the life assurance company pays on your behalf. This means you receive the maturity benefits tax-free.
Whole life policies: These are policies that provide life cover (and possibly additional risk cover, such as for disability) for the lifetime of the person in respect of whose life the policy is taken out. These policies do not have a maturity date or a maturity value that is paid out on a specific date.
Retirement annuities: Commonly known as RAs, retirement annuities are simply endowment policies sold in a retirement savings environment. The advantage of an RA is that within limits you can deduct your annual contributions from your taxable income and you also receive tax concessions on the maturity of the policy. You cannot mature (be paid out for) an RA before the age of 55, but the contractual period for the payment of contributions does not have to be until 55. You cannot contribute to an RA after the age of 69.
Fund values: A fund value is the actual value given to your investment in a life assurance endowment policy or RA at any stage from the day you sign up for the policy or RA until the day it matures at the end of the contract period. If you stop paying the premiums or reduce them, or change the policy term, the policy value will be recalculated, taking account of the costs. Any outstanding costs that have not been recovered by the time you reduce or stop paying your premiums will be deducted from your fund value. This is because when an RA fund or endowment policy is issued, the life assurance company funds the costs of the policy - including the upfront commission for the adviser, as well as the marketing and administration costs - with a view to recovering these costs over the agreed term of the policy.
Paid-up: A life assurance RA or an endowment policy becomes paid-up if you discontinue the premiums but leave the fund value invested.
Surrender: A life assurance endowment policy is surrendered when you stop paying the premiums and withdraw the reduced fund value before maturity. In terms of the Income Tax Act, an RA may not be surrendered before the age of 55.
Lapse: In the case of both life assurance RAs and endowment policies, a lapse occurs if you stop paying the premiums before the fund value exceeds the unrecouped costs on the RA or endowment policy, meaning that the paid-up (or surrender) value is zero.