You’ve probably heard the term “endowment” before, especially if you’ve been looking into the life insurance options on the market. It’s common to see insurance companies offering a two-for-one policy, where the insured can have both endowment and life insurance.
An endowment is an amount of money or property bestowed upon a named person at the end of the term or after the policy owner dies. However, there’s a lot to be aware of regarding endowment contracts.
What is endowment life insurance?
An endowment is a hybrid life insurance policy that pays a lump sum to a beneficiary after the contract matures or after the insured person’s death. A lump sum is a single payment instead of multiple smaller payments over time.
Contrary to popular belief, an endowment isn’t only about protecting your loved ones if you pass away. You can use it to cover your retirement, your children’s college, medical bills, or any future expenses. Endowment insurance is a low-risk way to save money for anything you want if you pay the premium each month.
These payments will eventually equate to the lump sum payout at the end of the contract term or the owner’s passing. If you pay the premiums on time, you will receive the guaranteed amount in the policy and a bonus amount.
What are the different types of endowment?
There are different types of endowment plans. So be sure to know which one is the best fit for your situation.
- Full endowment. A full endowment is a “with-profits” endowment where the basic payout equals the death benefit at the beginning of the policy. Yet, the final payout could be more significant because of invested money and bonuses added to the account.
- Unit-linked endowment. Unit-linked endowment plans are usually more high-risk than other options, and companies market them to people with high-risk bearing capacity. While it also provides life insurance coverage to the owner, the premium gets invested in the market and affects the final payout of the plan. The owner can sometimes choose where to make the investments.
- Low-cost endowment. These endowment life insurance plans help the insured secure funds for future mortgage payments, specifically interest-only payments.
- Non-profit endowment. A non-profit endowment is a “without profit” policy because there is no investment. The lump-sum payment clears when the policy matures or the insured passes away, whichever comes first.
Endowment policies vary, so be sure to know what you’re buying before you sign a contract.
When can you access the money?
There is a specified date when the money becomes available for every endowment insurance policy unless the insured dies before the plan matures. Then, the company will pay the money to the beneficiary.
The typical end-of-policy term for endowment plans is 10 to 25 years. However, you should know that the longer the term, the more money the insurance company pays out once the policy expires. Someone with a 25-year endowment is likely to make more than double that of a person with a 10-year endowment. So be sure to factor that into your decision if you want to purchase endowment life insurance.
What are the advantages and disadvantages of endowment?
Like all things, there are advantages and disadvantages of an endowment policy.
- Tax benefit. Premiums paid to an endowment policy can reduce the amount of taxable income each year. As a result, you’ll pay less in taxes. Who doesn’t like the sound of that?
- Death benefit. If the policy hasn’t matured, your loved ones can claim the money in the event of your untimely death. They can use the money for medical expenses, funeral costs, or anything else.
- Maturity benefit. The maturity benefit is the amount you receive once the policy term expires. The payout depends on the type of endowment insurance, the length of the term, and whether or not the investments performed as anticipated.
- Low-risk. People consider endowments to be low-risk in comparison with other investments.
- Dual purpose. People can use endowments for two reasons: to provide an insurance policy and a long-term investment benefit.
- Optional riders. Riders offer additional coverage. Most endowment plans offer other riders such as critical illness, family income, disability, accidental death, and waiver of premium.
- Bonuses. Some insurance companies offer additional bonuses, which is just money they add to the endowment account.
- High premiums. Monthly premiums are more expensive for endowment policies than whole life insurance policies. Plus, the shorter the policy term, the higher the premium.
- Surrender values. If you choose to surrender your endowment, you won’t get all of your money back, only a percentage.
- Limited protection. Endowment plans don’t cover everything, so be sure it’s the best option for you before you purchase one.
Everyone’s needs vary, so you’ll have to weight the pros and cons for yourself.
Can you cancel an endowment policy?
Yes, you can. The cancellation of an endowment is also known as “surrendering” the plan. However, you should know there might be a cost for canceling.
For most companies, if you haven’t paid three years of premiums, you probably won’t get your money back. If you have paid at least three years, you may receive a percentage of the money you paid back. Percentages differ depending on the company.
Can you use an endowment payout for college?
One of the most common reasons people buy endowment policies is to pay for future expenses.
If you have children, college tuition could become a motivator to take out an endowment. It’s a great way to put aside money — and possibly make more through investments — for your kid’s college fund.
College is expensive, and you shouldn’t have to worry about paying for it all at once. Other people use endowment payouts for retirement, debt, and other expenses, making it an excellent way to save for the future.
How is an endowment different from regular life insurance?
Endowment and life insurance seem like similar concepts when compared to each other, but there are key differences. One difference is that you can access your lump sum from an endowment before the owner’s death. The endowment money is yours once the policy term expires, unlike a standard life insurance policy, where you can only access the money after the policy owner’s death.
The best thing about these plans is that you can combine them. In most cases, insurance companies allow you to get the money from endowment life insurance once the policy expires or at the time of the owner’s passing.