BS
Licensed insurance agent
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Endowment life insurance is perhaps the least understood of all the different types of life insurance. Life insurance companies spend millions of advertising dollars promoting their whole life, universal life, and term life insurance products. Yet, you’ve probably never seen a single advertisement for endowment life insurance.
So, what exactly is endowment life insurance? When is it a better choice than other types of coverage, what are its pros and cons, and what are some popular alternatives? This article will answer those questions and more.
Endowment life insurance is a type of life insurance that stays in force for a fixed period, provides a death benefit to a named beneficiary if the insured dies during that period, and pays the insured individual a pre-determined payout if they’re alive when the period ends.
Premiums for endowment life insurance policies are sometimes called “monthly contributions” because the policy owner decides how much they want to save each month and when they want the policy to mature (endow).
In effect, the policy owner decides how much money they want to allocate each month towards life insurance, how much cash they want to save inside the policy, and when they want the payout if they survive the policy’s fixed period.
For example, let’s take the case of Gary, age 25, who is married with a one-year-old son. He wants to buy a life insurance policy that will pay his wife a $100,000 death benefit if he dies, and he also wants to have money available in 15 years to help pay for his son’s college tuition.
An endowment life insurance policy that matures in 15 years will work well for Gary in several ways. First, if Gary dies during the 15-year term, his wife will receive a lump sum payout of the $100,000 death benefit. Second, if Gary survives the fifteen-year term, he’ll receive a lump sum of money specified in his policy that he can use to help pay his son’s tuition.
Gary’s life insurance premium will depend on standard factors such as the policy’s death benefit amount, age, gender, health condition, tobacco use, lifestyle, etc. But, it will also be determined by the amount of money he wants to receive when the policy matures.
Endowment life insurance is similar to whole life insurance in that premiums are split (unevenly) between a death benefit and cash value accumulation. However, endowment life insurance premiums are higher than whole life premiums because the policy matures and pays out in fewer years than a whole life policy does.
Endowment life insurance policy payouts are made in a lump sum either to the policy’s beneficiary if the insured dies before the policy matures or to the insured if they survive the policy’s fixed term.
Most endowment life insurance policies endow in 5, 10, 15, 20, 25, 30 years, or at a fixed age, such as 65 or 70 years old. Like the payout their beneficiary receives when they die, the policy owner who receives a payout when the policy matures is free to use that money however they wish.
Endowment life insurance policies are typically purchased by people who want the protection of a life insurance policy combined with a way to save money for future needs.
For example, some life insurance companies market endowment life insurance to put money away for their children’s education, save and pay off a mortgage down the road, or set money aside for retirement. This appeals to many who like making one payment to cover their life insurance needs and save money for longer-term financial goals.
Like all of the different types of life insurance available, endowment life insurance policies have their pros and cons.
Pros
Cons
While some life insurance agents who receive handsome commissions for selling endowment life insurance policies will strongly recommend them, there are other life insurance agents and financial advisors who won’t sell them. They believe there are much better alternatives for their clients who want to combine life insurance with saving money, including:
Term life insurance with a 529 college savings plan: If a client’s major savings goal is to help pay their children’s college tuition in the future, many advisors will recommend a combination of term life insurance and a separate college savings account called a 529 plan.
They recommend term life insurance because it is usually the lowest-cost life insurance available for younger adults and parents with young children. This lets the parents contribute more money to the 529 plan for their kid’s future tuition needs.
However, it should be noted that unlike permanent life insurance policies (whole life, universal life, etc.), term life policies do eventually expire. This can cause you to buy a new policy when you’re older and pay much higher rates than you did for your initial term life policy.
A 529 college savings plan lets you choose how your savings are invested, rather than having the life insurance company determine the interest rate you’ll receive (which is usually very low compared to other savings alternatives).
A 529 plan can put money into mutual funds or buy individual stocks or bonds. In the early years, you can take more risks because you have a longer time horizon to build your account. You can eventually move your savings into lower-risk investments when you need to pay the tuition bill or other college-related expenses like fees and books.
A disadvantage of 529 plans is that the amount of money you have in the plan if/when your child applies for financial aid will count against you and could reduce the amount your child receives or disqualify them. This is not the case with endowment life insurance policies or other types of life insurance.
Term life insurance with a conservative investment plan. Some people want to buy a life insurance policy and save money without investment risk. Conservative investments they might prefer to mutual funds, stocks, and bonds are CDs, money markets, and bank savings accounts.
Permanent life insurance: Permanent life insurance policies like whole life, universal life, and variable life are similar to endowment life insurance in that they pay a death benefit to your beneficiaries if you die while the policy is in force, and they also accumulate savings in the policy’s cash value component.
The cash value can be withdrawn or borrowed from permanent life insurance policies to pay for emergencies or significant events like college, weddings, mortgage payoff, or retirement. But, unlike endowment life insurance, you can keep your permanent life insurance policy in force for as long as you want, as long as you continue paying premiums.
Annuity: Annuities are non-insurance products that are a way to save money and have that money grow without paying taxes on the growth until you begin receiving a payout. With an annuity, you can also name a beneficiary who will receive any money left in the account when you pass away.
IRAs, 401(k)s, and other retirement plans: IRS-approved retirement plans like these let you save money and enjoy some very nice tax advantages without buying life insurance you don’t need. The money you contribute to these plans can be invested as aggressively or conservatively as you wish, and the growth potential is much greater than it is for endowment life insurance.
You can find an endowment life insurance policy in several ways:
Online: Doing a Google search for “endowment life insurance” will list companies that sell these policies on the search results page. Most of these companies’ websites contain information about how the policies work and provide a toll-free number for you to call, ask questions, or apply for coverage.
Keep in mind that these websites are created by life insurance companies that want to sell you a policy, not provide you with alternatives to life insurance, which may better meet your needs.
Some websites, like Investopedia , can provide information on endowment life insurance and recommend alternatives. They also have links to connect with life insurance companies that can give you quotes on different types of policies.
Work with a life insurance agent: A licensed agent who sells endowment life insurance will be biased in favor of the product, which is understandable since they earn their living selling it.
However, suppose you’re determined to buy an endowment life policy. In that case, an agent can explain the features and benefits of the policy, help you complete the application, and provide service after your policy is issued, should you need it.
If you’re thinking about buying endowment life insurance because you need more life insurance protection and you want to save money for future needs you’ll have, endowment life insurance is a good alternative.
However, before you sign an application, take the time to compare it to other permanent life insurance products that also have a cash value savings feature. You may find that one of these policies will better meet your needs.
If you don’t have life insurance protection in force, don’t delay finding the right policy for you and your family; your health and insurability can change quickly and unexpectedly.
