Endowment Insurance Basics
An endowment insurance policy is a long-term life insurance contract designed specifically to pay out a fixed amount upon death or a specific time. Typical term limits are usually ten, fifteen or thirty years up to the usual age of retirement. In some cases, however, endowment policies pay out if the insured develops a chronic condition. One kind of chronic condition that might come up in an endowment contract is Alzheimer’s disease. Therefore, anyone with endowment insurance should make sure to get regular medical exams.
Endowment insurance can be used as a source of income for workers who are terminated from their jobs. The premiums paid by such workers are exempt from state and federal taxation. In addition, bonuses and endowments paid to such workers are usually exempt from income tax as well. Although these benefits do not contribute to any employee’s death benefit, bonuses and endowment policies may reduce the amount of money available to the beneficiary.
In contrast to ordinary life insurance contracts, endowment insurance does not limit the amount of money that can be paid out or how it can be invested. Unlike a variable life insurance policy, endowments are not designed to guarantee a particular amount of financial security for the beneficiary. In the case of endowment insurance policies, beneficiaries can access the money as and when they need it. They just have to make premiums payment that is currently being held by the insurance company.
An endowment insurance plan can be of different types. Endowments can either be fixed or flexible. A flexible endowment insurance is designed to provide a low interest rate for a specified period of time. Usually, they are made with terms of ten or fifteen years. The endowment also allows for the option of increasing the payment as the insured grows older over the specified period of time.
A fixed endowment insurance policy is different from other life insurance policy in that it does not permit the policyholder to borrow additional funds and roll them over into a new endowment policy. Instead, the insured pays a constant premium payment each year. If the insured dies during the period of the policy, his beneficiaries will get back only the premiums already paid. Therefore, the premiums paid are not refundable. This type of policy is only useful as an investment instrument.
Endowment insurance also comes with non-participating benefits. These are generally defined as the right to receive a cash value equal to the difference between the account balance and the accumulated death benefit. Some companies provide non-participating endowments with guaranteed returns in the form of dividends and capital appreciation. Others may give the insured the option to invest in stocks and bonds or other assets with guaranteed returns. If these options are not available, the endowment will earn interest on a tax-deferred basis.
It should be noted that most policies provide endowment insurance with respect to the death benefit only. The premiums paid are in addition to the death benefit. In some cases, the premiums may also be used to finance other features of the endowment policy. The guaranteed minimum returns provision of non-participating endowments is often combined with guaranteed interest provisions in order to produce a more comprehensive insurance product.
Endowments are relatively simple financial instruments. In general, there is no legal entanglement with third-party vendors such as life insurers and investment firms. This simplicity also makes endowment policies attractive to small investors. Most insurance providers will provide a wide range of endowment policies designed for many diverse risk characteristics.
The two basic types of endowment policies are endowment life insurance and endowment retirement annuities. Both feature a cash surrender value, which is the amount of cash an investor receives when the policyholder dies. Premiums are generally computed per unit, but they can also be directly determined by the insurer. In a whole life insurance policy, the death benefit and premiums are paid in one settlement payment. The death benefit amount is equal to the greater of current discount and face value. Premiums are normally collected once the death benefit is received.
In endowment policies, there are typically two types of invested funds: managed endowments and investment endowments. Managed endowments are investments that directly pay into the insurance. Investment endowments are investments that earn premiums in return for paying into the insurance. Some managed endowment policies may also pay dividends to the insured. Some insurance providers may also allow the insured to use interest from the policy as capital.
Endowments are usually established for specific needs. Life insurance is often best purchased when the insured has a specific need, such as a mortgage or an education fund. Beneficiaries can be family members or other businesses or individuals. There is generally no minimum balance requirement, so it is possible to have huge returns and very little risk. Endowment insurance policies are usually tax-free, so they offer significant cost savings compared with term life insurance policies.