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Endowment life insurance is designed to provide a payment to the beneficiaries of the contract on the death of the insured or to the insured himself at the end of a determined period. An endowment life insurance policy can serve as a savings and investment vehicle, but it’s not for everyone.
Depending on your financial situation and needs, term life insurance or a permanent policy might be more appropriate. Understanding what it means to have funded life insurance can help you decide if this type of coverage is right for you.
What is capitalization life insurance?
Capital insurance is a type of life insurance that allows the policy holder to pay premiums and receive reimbursement on a specified date. If the insured dies before this date, a mixed life insurance contract can be paid to the beneficiaries instead.
With a traditional life insurance policy, the insurance company pays a death benefit to the beneficiaries only when the insured dies. There may be an exception to this rule if the policy includes an accelerated death benefit rider, which would allow the insured to receive a portion of the death benefit sooner to cover end-of-life care.
Endowment life insurance can be used as a savings vehicle, since a portion of the premiums paid is invested to generate interest. This is similar to how permanent life insurance works, accumulating cash value. There are, however, some differences in how endowment life insurance works.
How does mixed life insurance work?
A life insurance endowment policy works by allowing the policyholder to collect payment at the end of a specified contract period. If the insured dies before the end of the term of the contract, his beneficiaries receive a death benefit.
When you take out an endowment life insurance policy, it comes with a fixed term during which you will pay premiums. The term depends on the policy and can be as short as five years or as long as 30 years. Endowment policies can also be structured to cover you until you reach a certain age.
As you pay premiums, some of the money goes to fund the policy’s death benefit, but some is invested. The premiums you pay may depend on the amount of the policy benefit and the duration of the contract. The shorter the term, the higher the premiums tend to be.
If you are still living when the contract ends, the insurance company pays you the face value of the policy. You may receive a lump sum payment or a series of payments, depending on the structure of the policy. If you die before the end of the contract, your beneficiaries receive compensation instead.
Advantages and disadvantages of life insurance policy
Generally speaking, life insurance is designed to provide financial benefits to your loved ones after you leave. With endowment life insurance, you can enjoy the benefits of the policy yourself if you survive the term of the contract.
Advantages of mixed life insurance
In terms of benefits, here are some of the reasons why you might consider an accumulation policy:
- Double benefits. An accumulation policy can offer you payment of the face value of the policy as the insured or a death benefit for your beneficiaries.
- Investment growth. A portion of the premiums paid is deposited in a savings or investment vehicle. This allows your money to grow over the life of the contract, which can be attractive if you’re looking for an insurance policy that offers built-in planned savings.
- Minimal risk. Endowment life insurance is designed to be low risk. The money invested can earn a steady rate of return and a payout is guaranteed to you or your beneficiaries.
Disadvantages of mixed life insurance
So why would anyone think twice about this type of insurance? There are disadvantages associated with endowment life insurance coverage:
- High premiums. Premiums for funded life insurance tend to be higher than for other types of insurance coverage, including permanent insurance with a cash value. It is important to determine whether the benefits justify the cost.
- Limited coverage. Endowment policies are designed to last only for a specific period of time, and these policies are generally not renewable or convertible. So if your policy covers you until age 65, for example, and you want to be insured for the rest of your life, you will need to purchase additional life insurance. It could be expensive, depending on your age and health.
- Low yields. Although money invested in an endowment life insurance policy earns interest, returns tend to be lower. Depending on your investing style and risk tolerance, you might be able to get a much better return on your money by putting it in the market instead.
Endowment life insurance also has some disadvantages if you decide to terminate the policy early. Although you may be able to opt out of the policy before the end of the contract term, the insurance company may charge high surrender fees for doing so. And any cash value you may receive from the policy may be far less than what you paid in premiums.
Should You Buy an Endowment Life Insurance Policy?
At first glance, capital insurance may seem attractive since you or your beneficiaries are guaranteed to receive a financial benefit and the policy can double as an investment fund. However, it is important to consider whether your needs could be better met by another type of life insurance or savings vehicle.
For example, some common uses of endowment life insurance include retirement savings and education savings. You can structure your policy to pay you back at age 65, in retirement, or after 15 years, when your kids could be headed off to college.
What you need to keep in mind is how your money will have to grow during the term of the contract and what kind of tax benefits you might get by investing elsewhere.
A traditional Individual Retirement Account (IRA), for example, can offer tax-deductible contributions and tax-deferred growth. A Roth IRA can offer tax-free qualified distributions or withdrawals. You can invest in mutual funds, exchange-traded funds (ETFs), and other securities, all of which could outpace the growth generated by an endowment policy.
With a 529 college savings account, you can choose from a similar range of investment options. Although there is no federal tax deduction for contributions, your contributions can grow tax-deferred. Withdrawals are tax-free when the money is used to pay qualified graduate school fees.
If you still need life insurance, you can explore other options, including term life insurance and whole life insurance. With term life, you are covered for a set period of time. With whole life insurance, you are covered for your natural life as long as the premiums are paid. Some whole life policies can also accumulate cash value that you can borrow against over your lifetime.
Endowment life insurance can fill a specific gap in your financial plan, but it’s important to understand how much you’ll pay for it and what kind of value you’ll receive in return. Work with a financial advisor to determine if accumulation life insurance is the best fit for your overall financial plan.
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Endowment Life Insurance FAQs
What is the difference between life insurance and endowment?
Life insurance is designed to pay a death benefit to your beneficiaries when you die. An endowment policy provides a death benefit if you die during the term of the specified contract or a subsistence benefit if you are still alive at the end of the contract. In this sense, endowment policies are often marketed as savings and investment vehicles with a life insurance death benefit.
What is an endowment contract used for?
Endowment policies are designed to act as a planned savings and investment vehicle. As you pay premiums, some of the money is invested and grows over time. At the end of the policy term, you receive a living benefit from the policy or, if you die, your life beneficiaries receive a death benefit.
Which is better, term life insurance or endowment life insurance?
Term life insurance can be a good option if you are not interested in a savings component. Endowment insurance is more appropriate in situations where you want to use the policy to fund a specific financial goal, such as paying for a college education. Between the two, term life insurance tends to have lower premium costs.
Are the staffing plans good?
Endowment plans may be suitable for people who want to use them to fund certain savings goals. But compared to other types of life insurance, endowment plans have higher premiums and you may see lower rates of return on the investment portion of the policy. It is important to consider what your goals and needs are before purchasing this type of insurance.