Endowment Insurance

When it comes time to choose a life insurance policy, we mostly hear about two options: term policies and permanent policies. They are the most common, but there is another type of plan many take advantage of, it is called endowment insurance. This is a very unique type of policy guaranteed to pay out whether the covered individual dies during the term or not. These special provisions set endowments apart from traditional insurance policies, allowing them to be seen as an investment. In fact, with the uncertainty of the markets, some are turning away from stocks and purchasing endowments to provide security for a child’s college savings.

Endowments are just as simple as they sound: you pay a monthly premium for a set period or until a certain age, then the benefit is paid out at the end of the term. It’s that straightforward. The particulars of the agreement may even allow you to cash the plan in early for a set amount (the “surrendered value”) based on how much has been paid into the policy and receive bonuses every year or at the end of the term. In many cases, endowments have tax advantages , though they have been tightened up in the last few years.
What prevents most people from choosing this type of insurance policy is the cost. Since the policy will pay out whether the individual lives or not, premiums are substantially higher than those for term or permanent life insurance. Companies often make the terms of endowment policies more restrictive i.e. the premium remains same regardless of the individual’s income change or economic fluctuation. Further, most of the premiums are used to produce the guaranteed money and bonuses connected to the eventual payout, meaning the rate of return is lower as there is less risk involved.
There are two types of policies which can be purchased. The most common is known as a with-profits endowment. These policies are centered around investments i.e. bonuses are determined by how well the markets are doing from year to year. The cash value of the policy will rise and fall based on this, making the surrender value comparatively unstable. These policies can be sold on and coverage transferred to another individual, which allows those who are unsatisfied with the surrender value to turn a greater profit.
Unit-linked endowments allow the insured a little more freedom in the investment of their premiums. With-profit options provide a general set of choice, but each payment into a unit-linked endowment gives the individual a certain number of units to spread across different funds based on their risk preferences and goals. Cashing the policy out is therefore the result of the value and number of the particular units.
It is important to remember the nature of endowment policies. Though it’s always important to consult with a variety of companies to determine coverage options and premium rates, when considering endowments be sure to talk with your accountant or financial advisor, also ensure your investments fits well.
Last Updated: 10/04/11