What are endowment policies?

Written by brandi berry-fulton
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What are endowment policies?
(naslrogue: flikr.com, angela n: flikr.com)

An endowment life insurance policy is one of the many life insurance policies that are available. When choosing an endowment policy, it is important you know all the in's and out's of the policy to make sure that it best meets your needs. An endowment policy does not have to be confusing if you understand what it is and how it compares to the basic types of life insurance policies.

The Basics

An endowment policy is a combination of both an investment and a life insurance policy that gives the owner of the policy a payout of cash after a set amount of time. The payment of an endowment life insurance policy is guaranteed if the insured person survives to the end of the set amount of time or to payable to dependants upon the death of the insured. The set amount of time is referred to as the endowment period.

What are endowment policies?
Do you have life insurance?

Special Merits of Endowment Policies

There are three special merits of an endowment policy. First, it is a policy that combines both protection and investment. Second, it is a method of mandatory saving. Third, it is a way to establish funds for special objectives that the owner of the policy has the ability to use. These three special merits allow the owner to save for the future while giving her insurance coverage and the possibility of attractive returns while the policy matures.

Who Uses Endowment Policies

Over the last 15 years, endowment policies have not been used by many people. In the past, endowment policies were popular at the majority of insurance companies as savings mechanisms. Endowment policies were previously used by middle class or wealthy people who would not have an immediate need to access or use the funds before the policies maturity date. Currently, many people, no matter their financial position, no longer use endowment policies, but instead use annuities or universal life policies.

The Benefits of an Endowment Policy

These include attractive returns. When you save a modest amount month to month, you will see your money increase gradually and often have better returns than bank deposits. There will be a bonus upon maturity. Your insurance coverage will increase over the period of time as bonuses are accumulated. The endowment policy offers flexibility as you can choose the duration of the policy anywhere from 10 years to 30 years. Cash value is another benefit as most endowment policies have a cash value after two years, allowing the policy owner to take a cash loan of up to 95 per cent of the policy's value.

Disadvantages of an Endowment Policy

The disadvantages are that the payout is taxable. Also, if the market does better than you, you are locked in and cannot take advantage of an upward swing that will allow you to make a greater profit. And you will have to pay a penalty if you take out the money earned before the agreed upon endowment period. The policy is not recommended for people who might need the money sooner than the maturity date.

How an Endowment Policy Can Be Used

An endowment policy can be used for planning college education expenses to saving money for retirement. The endowment policy pays out a set amount, making it more reliable than other investments that might fluctuate with the economy. The known amount helps the owner plan for how and when the payout of the policy can be used.

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