What is Endowment Life Insurance?

What is Endowment Life Insurance?

If you've considered getting life insurance, once you start some basic research you will find that there are a variety of options but perhaps only one or two plans will actually meet your needs. In order to explore endowments, first let's go over some easy concepts in order to aid your understanding because this field has its own language.

Function

When you purchase life insurance you are transferring the risk of loss (death) to an insurance company, who spreads the costs of unexpected losses to many individuals. Realistically, only a small number of the insured individuals will actually suffer a loss. Now in order to get this insurance, a contract is made between an insurer (the company), an agent (someone who has the express authority to act on behalf of the company), and the applicant. The agent explains the contract to the applicant--usually the person applying is insuring themselves or someone with "insurable interest," like a family member or key business partner. Under the contract terms, the insurer promises to pay a death benefit to a beneficiary (someone you designate) when death occurs, in exchange for your premium payments. If everything is approved (by an underwriter), you become the policy owner.

Significance

To determine if you need life insurance ask yourself these questions: Does a loved one depend on my income? Do I have an event upcoming that I need to plan for (such as college costs, funeral expenses or a mortgage payoff)? Am I seeking an investment or do I just need a temporary program in the event something happens to me in the near future? Do I have enough income to purchase a plan? Or, in the case of business: If my business partner dies would I be able to still fund the company or buy up my cohort's interests?

Considerations

There are different types of life insurance and they vary depending on how much insurance you can afford (your payments and objectives); how much of a risk you are (based upon assessed standards--also called "underwriting"); how much you want to pay and when (premiums); and whether you need a temporary plan or permanent protection.

Features

Endowment life insurance provides a permanent sum of money (called a face amount or death benefit) to your beneficiaries should you die before the maturity date of the policy. OR, it will pay you if you live when the policy pays out (endows). This is similar to whole life insurance, except: if used before the endowment period, the life insurance ends and the face value becomes a >living benefit.< Another area where they differ is with the period of time when it matures. A whole life insurance policy is generally set up to mature at age 100. But with an endowment you can pay the premiums well before the final date, for a limited period of time, or in a lump sum; and the cash value builds up faster since the funds are intended to be used while the insured is alive. But the premium is considerably more expensive than with an ordinary straight life insurance policy. The sooner a policy endows, the higher the premium will be. The endowment period can be set for ten years, twenty years or to age 65, for instance.

Theories/Speculation

If you want a type of structured savings to cover specific expenses like a wedding, college or protection in the near future, endowment meets that need as well as being life insurance. The problem with this is that the program used to be a kind of tax dodge but the Tax Reform Act of 1984 changed that, so many of the tax benefits are lost.

Warning

Before purchasing an endowment do these things: compare rates between companies, assess it against other savings plans and check with your tax accountant for suggestions.

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