Endowment insurance is a type of life insurance that is often purchased by people who are close to retirement age and need some assurance that their loved ones can still pay off their mortgage in case they are not well enough to work. An endowment plan can be an extremely valuable asset for your family in the event of your demise. Many people who purchase endowment policies do so with the expectation that the policy will provide a lump sum payment upon the policyholder’s death. If this is not the intention of the buyer, then the endowment plan should be reviewed in light of its cost and other features that may make it a better value in the long run. The advice of a competent life insurance professional is recommended in such cases.
An endowment insurance policy is simply a life insurance contract designed specifically to pay out a regular sum of money upon the policyholder’s death or a specified term up to a pre-determined age. Typical term lengths are usually ten, fifteen or thirty years up to certain age limits. Some plans also pay out if the insured develops critical illness. This coverage can extend even beyond death if the policyholder has designated an estate plan in their name that will provide the proceeds. These plans often have flexible terms that can be altered or changed as the needs of the insured to change over time.
Unlike other forms of life insurance, endowment insurance does not allow policyholders to choose between two options: cash value and non-cash value. Policyholders are only forced to choose between non-cash values during the term of the plan. Cash values are more likely to generate larger returns, but there is no guarantee that these returns will be larger than the interest earned on the accumulated cash. This can lead to policyholders having to borrow money against the endowment in order to service the endowment.
Guaranteed benefits do not accrue from the start, but must be earned throughout the term of the plan. Because endowment policies are often tax deferred, they have relatively low premiums. This is because premiums are based solely on the premium and not on the face value of the endowment. In return, however, there is very little flexibility for policyholders since they cannot choose between premiums. Many companies providing endowment insurance offer guaranteed benefit bonuses to policyholders who pay premiums and participate in a structured endowment plan.
Guaranteed bonuses are another unique aspect of endowment insurance. Generally, bonuses are equal to one percent of the face value of the plan. The maximum bonus amount is based on the age of the policy, the highest paid years up to the maximum membership age, and the tenure of the plan. Policyholders who join after the maximum bonus amount never pay any bonuses. However, they are subject to the policy’s terms and conditions, including possible withdrawal if they become vested.
One of the most popular types of endowment insurance is college savings plans, also known as endowments. These plans provide endowments with tax deferred principal that is invested in a variety of bonds, stocks, and mutual funds. In return for the premium paid each year, endowments receive interest payments. As with endowment policies, these payments are based on the performance of the stock market and may be linked to the performance of the bond index. In contrast to premiums paid on endowments, however, endowments offer no flexibility and must be started early to be effective.
One drawback of endowment policies is that they tend to attract high premium payments from policyholders who are young and healthy. These same policyholders may, on the other hand, be more likely to default on their payments if they are older and less healthy. As a result, the insurance company may be left with an uneven balance between the premium it charges on the principal and the risk it faces by offering such a high premium to older, less-flexible customers. In addition, endowment insurance policies frequently do not have enough flexibility to accommodate drastic fluctuations in investments or investment objectives and may lose value over time. Finally, endowment policies often do not have enough flexibility to provide adequate coverage for the needs of the policyholder and may lock policyholders into a higher risk than they would find elsewhere.
The least expensive type of endowment insurance policy is term life insurance. Under a term life insurance policy, the insured pays a premium for a pre-specified period of time, the period usually being one to twenty years. If the insured does not die during the specified period, the remaining premium amount is paid by the insurer. The benefits of term life insurance policies can be more limited than endowment policies but they offer more safety and can be used as a supplement to endowments or other long-term financial strategies.