Endowment life insurance is often a single payment policy which acts primarily as an investment while providing life insurance protection. Endowment policies, like whole life insurance, are popular as a gift for children since cash value in the policy usually must remain untouched for between 15 and 20 years to realize its full cash equity, at which point, it may be used for college tuition, living expenses, or even a down payment for a mortgage.
There are different types of endowment life insurance policies, but they are all very low-risk investments offering moderate returns.
Full Endowment Life Insurance
In a full endowment policy, the amount of the final payout is guaranteed to be at least equal to the amount of the death benefit. If growth occurs, the payout could be considerably higher than the death benefit.
Full endowment policies require a single payment or multiple lump sum payments and are a long term investment since the cash value generally has to remain in the policy for 15 to 20 years, or till you are 65 for some policies.
There may be some exceptions in the policy including diagnosis of a critical or terminal illness in the insured person, allowing a policyholder to pull out the equity earlier than expected.
Modified endowment policies are not paid as a single lump sum, but have fewer than seven fixed level payments in a year. Endowment life insurance has tax advantages and modified policies allow more individuals to use these policies as tax shelters.
The returns are tax deferred until they are removed from the policy and many consumers use endowment policies to save for retirement. The biggest tax benefit is that death benefits on life insurance policies are not subject to income taxes.
Low Cost Endowment
A low cost endowment policy has a decreasing benefit with an estimated growth rate that will meet a target figure at or before the end of the policy term. This type of policy is most often used to insure mortgages where the principal decreases as the death benefit decreases.
In the event the insured person dies during the policy term, the death benefit will pay off the existing mortgage. If the insured outlives the policy term, he will collect money on the investment.
Similarly, applicants may decide to look into decreasing term life insurance or mortgage life insurance for comparable coverage.
Other Features To Consider
Endowment life rates are higher than those of whole life insurance since payment of the death benefit amount is guaranteed either to beneficiaries upon the insured person’s death or to the insured person when the policy reaches maturity.
One disadvantage of endowment coverage is that it lacks flexibility like universal life insurance, and the money cannot be used during the term of the contract except in specific instances, such as serious illness, outlined in the specific policy you buy.
Endowment life insurance may be best for families looking at moderate but stable, guaranteed returns.
As An Investment
Endowment life insurance pays a moderate rate of interest in a secured investment. The returns on investment are tax deferred which may make it attractive to some individuals considering life insurance as an investment. Taxes become due on the entire sum of the profits when the policy is redeemed or paid out.
In most endowment policies, the payment of the sum agreed upon at the policy’s inception is paid to the insured person when the contract matures. It can be used in both estate and financial planning to meet goals like retirement, leave a legacy, or an inheritance for heirs.
The higher cost of endowment life insurance policies makes them primarily an investment with an insurance component. Consumers should find and compare free quotes on different types of life insurance. Consumers can compare coverage, policy terms, and rates with other types of life insurance to decide whether an endowment would make a good investment.