The purpose of endowment life insurance is to provide a payout to the beneficiaries of the policy if the insured dies as well as to the insurance themselves after the specified time. A life insurance policy with an endowment can be used as an investment and savings vehicle; however, it’s not the best choice for everyone.
A term or long-term policy could be the better option based on your financial circumstances and requirements. Understanding what it means to get life insurance with endowment may help you decide if this policy is appropriate.
What Is Endowment Life Insurance?
Endowment insurance is one type of life insurance that allows the policyholder to pay premiums and get the money back on the specified date. If the insured individual dies before the date, an endowment policy could pay to beneficiaries instead.
In a standard Life insurance policy, an insurer will pay an amount of death benefits to beneficiaries only after the insured dies. There could be an exception to this policy if the policy has an acceleration of death benefit rider. This allows beneficiaries to get part of the death benefits early to pay for their final expenses.
Endowment life insurance may function as a savings vehicle as a part of the premiums is invested to earn interest. This is similar to how permanent life insurance builds cash value. However, there are specific differences in the way that life insurance with endowment functions.
How Does Endowment Life Insurance Work?
An endowment life insurance policy allows the policyholder to receive the amount due at the end of the contract’s specified time. If the insured dies before the end of the contract period, the beneficiaries are awarded an inheritance upon their death.
Buying an endowment-based life insurance policy will have a fixed period during which you’ll be paying premiums. The policy determines the length of the term, and it can be as brief as five years or extended to 30 years. Endowment policies are also constructed to cover you until you reach a certain point.
If you pay for premiums, some of the funds go towards the death benefit payment. However, a portion of it is put into investments. The amount you pay for premiums will be contingent on the policy’s benefit amount and the contract period. The shorter the duration, the longer the term, the more expensive the premiums are likely to be.
If you’re still living on the date the contract expires, the insurer will pay you the amount that the contract provides. You could receive a lump sum or installment payments based on how the policy is designed. If you die before expiration, the beneficiaries will receive an amount instead.
Life Insurance Endowment Policy Pros and Cons
In general, life insurance is intended to offer financial assistance to your family members after death. In the case of endowment life insurance, you could benefit from the policy on your own if you do not live to the end of the contract.
The benefits of endowment life insurance
About the benefits in terms of the benefits, here are a few of the benefits you could look into an endowment policy
- Two benefits. An endowment policy may provide a cash payment of the policy’s value to the insured or a death benefit to the beneficiaries of your policy.
- Investment growth. Part of the premiums you pay are put into an investment vehicle or savings account. This allows your funds to increase throughout the contract. This could be attractive if you’re seeking an insurance policy with an investment plan built into it.
- Minimum chance of risk. Endowment life insurance is designed to be low-risk. The money you invest can be guaranteed a steady return, and the payout is assured to the beneficiary or you.
The drawbacks of life insurance with endowment
Then why should anyone be hesitant about this kind of insurance? There are a few drawbacks to life insurance with endowment:
- Premiums are high. Premiums for life insurance with an endowment are likely to be more expensive than other insurance policies, like permanent insurance with cash value components. It is essential to determine if the benefits outweigh the cost.
- Limited protection. Endowment policies are made to be used for a specific time frame only and are not typically convertible or renewable. Therefore, if your insurance policy will cover you until age 65, as an example, and you’d like to be protected for the rest of your life, you’ll need to buy an additional insurance policy for life. It could cost a lot, depending on your health and age.
- Returns are low. While the money put into an endowment life insurance policy is a source of interest, returns are usually in the lower range. If your investment style and the risk you are willing to take, you might be able to achieve more for your investment by placing it into a market instead.
Life insurance with an endowment also comes with certain disadvantages if you’d prefer to cancel the policy before. Although you might be able to cancel the contract before the expiration of the contract, the insurance company could be charged a high surrender fee to do this. The cash value you’re entitled to from the policy could be less than what you’ve paid in fees.
Should You Buy a Life Insurance Endowment Policy?
At first, endowment insurance might seem appealing as either you or the beneficiary will receive financial benefits and it can also be used as an investment plan. But, it would help if you examined whether another life insurance policy or savings vehicle could better serve your requirements.
Examples of typical uses for endowment life insurance are retirement and college savings. You could plan your policy to repay your money when you reach age 65, to fund your retirement, or at the end of 15 years, when your children may be heading off to the college of their choice.
You need to know how your cash will grow throughout the contract and what tax advantages you may enjoy by investing in other areas.
A conventional Individual Retirement Account (IRA) is a good example. It allows tax-deductible contributions and tax-deferred growth. A Roth IRA can offer tax-free qualified distributions or withdrawals. You can put your money into mutual funds ETFs, exchange-traded funds (ETFs), and other types of securities. All of these could outpace the growth generated through an endowment plan.
If you have a 529 college savings account, you have the option of choosing from a similar selection of investment choices. While there’s no tax-deductible federal contribution deduction, the funds could grow tax-free. The withdrawal is tax-free if they are used to fund certain higher education costs that are eligible for tax deduction.
If you still need life insurance, you have alternatives to consider, such as term life insurance and Whole life insurance. With term life insurance, you’re protected for a specific timeframe. With whole life, you’re protected throughout your entire life, so long as the insurance premiums have been paid. Specific whole life insurance policies also accrue cash value, which you can use to borrow during your life.
Life insurance with endowment can help solve a particular need within your budget. However, it’s essential to know the cost you’ll have to pay for it and the benefit you’ll be getting in exchange. Consult with a financial adviser to determine whether you should purchase endowment insurance. It’s the most appropriate choice for your overall financial plan.