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Understanding endowment life insurance

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If you need life insurance but you’re unhappy with term and permanent options, you may want to consider endowment life insurance. This unique policy type can provide the protection of life insurance but also pulls double duty as a savings tool.

How do endowment life insurance policies work?

Endowment life insurance policies offer temporary coverage for a predetermined term. If the insured dies during the term, the insured’s beneficiaries receive a payment. If the insured survives the term, the insured has the ability to receive a payout. During the term, the insured is expected to pay premiums to keep the policy active.

Endowment vs. Term Life Insurance Policy

Both endowment and term life insurance supply temporary coverage that expires at the end of a predetermined term. The key difference is that term life insurance does not provide a payment to the insured if the insured survives the term, although some term life insurance policies may come with a return of premium rider that returns some of the premium payments.

Consider the following four scenarios. In each case, the policyholder is 40 years old and buys a policy with a 20-year term.

  • Bethany buys an endowment policy. When she turns 60, her policy ends and she receives a payment.
  • Paula buys a term life insurance policy. When she turns 60, her policy ends. She may be able to convert it to a permanent life insurance policy if she acts within the provided window. If she doesn’t, her coverage will end and she will receive nothing.
  • David buys an endowment policy. When he is 55, he passes away. His beneficiaries receive the death benefit that was already established by his endowment policy.
  • George buys a term life insurance policy. When he is 55, he passes away. His beneficiaries receive the death benefit.

How to Use an Endowment Life Insurance Policy

When you buy an endowment life insurance policy, you have the ability to pick the term, which is how long the coverage will be active. The term could be fairly short (for example, five years) or as long as 20 or 30 years. By choosing appropriate terms, you can use endowment policies to help support your financial goals.

Some endowment life insurance policies have a term that ends when the insured turns 65 and reaches retirement age. Imagine a 35-year-old software developer has three young children and a wife who doesn’t work outside the home. He knows he needs life insurance to provide for his wife and children if anything were to happen to him. However, he’s also worried about his retirement because he’s behind on his savings. He decides to purchase an endowment life insurance policy with a 30-year term. If he dies before the age of 65, his wife and children will receive the benefit, which can help them to keep their home, afford basic living expenses and potentially even cover some educational costs. If he survives to age 65, he will receive a benefit that he can use to help fund his and his wife’s retirement.

Similarly to term life insurance, people may also use endowment life insurance to cover a set period when having life insurance is particularly important. For example, imagine a single mother with two young children purchases an endowment life insurance policy with a 20-year term. This time period is long enough to provide protection for her children until they are fully grown. If she dies during this time, the benefit will help provide for her children. If she survives, she can use the endowment benefit to help pay off her debts or help her adult children get started in life.

Pros and Cons of an Endowment Life Insurance Policy

Endowment life insurance has both advantages and disadvantages.

Some of the benefits include:

  • Endowment life insurance acts as a life insurance policy with the benefits of a savings tool. You don’t need to decide whether you want to save your money or use it to buy life insurance – it gives you the ability to do both.
  • The premiums are invested. This increases the value of the policy, similar to how whole and universal life insurance policies increase in value due to frequent investments.
  • You have a guaranteed payout. In contrast, there is no guarantee of a payout with term life insurance.

Some of the drawbacks include:

  • The payout may be lower than what you could possibly achieve using another type of investment. If you’re looking for a high return, you may want to consider investing your money elsewhere.
  • The cost is high compared to term life insurance policies. If you can’t afford to keep up with your premium payments, the policy could lapse, which would mean you’d eventually lose coverage.

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Alternatives to Endowment Insurance

If you have people who depend on you, life insurance can be an effective way to ensure you provide for them no matter what happens. However, there are many different types of life insurance to consider. For some people, endowment insurance might be a good fit. For others, a different type of life insurance policy may make more sense.

  • Term life insurance has the ability to provide basic life insurance coverage for a predetermined period. As this is typically the most affordable type of life insurance, it might be your best choice if you’re looking for a more cost-effective policy. The money you’ll be saving could go towards buying more coverage to give your loved ones more protection.
  • Permanent life insurance allows for lifetime coverage. As long as you keep up with the premium payments, your policy can cover you for as long as you live. It also accrues a cash value that the policyholder can access during their lifetime by taking out a loan or making a withdrawal. There are multiple types of permanent life insurance. Whole life insurance provides consistent premiums and a guaranteed benefit, whereas universal life insurance provides more flexibility.
  • Life insurance riders permits you to customize your life insurance coverage with additional terms and benefits. For example, a return of premium rider on a term life insurance policy lets you receive some, if not all, of your premiums back. An accelerated death benefit rider allows you to receive a benefit if you are diagnosed with a terminal health condition.

Is endowment life insurance right for you?

An endowment life insurance policy may sound enticing because it can provide a guaranteed benefit if you keep up with your premiums. However, there are a few things to consider when deciding if an endowment policy is the best choice for you.

  • Can you afford an endowment life insurance policy? If you are unsure about your ability to keep up with the premiums for the entire term, you may be better off selecting a less expensive term life insurance policy.
  • Would you rather invest your money in a different account? For example, you could invest your money in a retirement account or a college savings account for your children.

Higginbotham can help you review your life insurance options and secure you with a policy that fits your family, lifestyle and financial situation. Talk to a life insurance specialist who cares today.

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