In life insurance, what is an endowment plan?
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The endowment life Insurance policy is like a regular life insurance contract, in that it has a face amount, which is paid to the beneficiary upon the death of the insured. However, it matures faster than a life insurance policy. When it matures, it means that the policy is paid-up. At that time, if the insured is still alive, they can choose to receive the face amount of the policy.There is no more death benefit after this.
If the insured dies any time before the contract matures, the beneficiary receives the face amount.
When considering an endowment plan, compare the cost of insurance and the return guaranteed before making your purchase. Years ago, people would purchase endowment contracts to fund a child’s college education, or to pay off a mortgage. Some people even bought them as retirement income vehicles. If they lived to the maturity date, they could choose to take the money as a lump sum or as monthly income. Compare car insurance rates now by using our FREE tool above!
Reasons to Own Endowment Plans
There are several reasons to own an endowment contract. Some of the most common reasons include:
- Funding a child’s education: By paying money into a 15-year endowment contract, parents can be assured of having the money needed to pay tuition and living expenses for their child when they are ready for college. However, it also provides the money, even if the parent dies before the time it is needed. In this respect, the endowment serves two purposes.
- Paying off a mortgage: An endowment contract can serve as a way to pay off a mortgage by a specific date. Payments into the endowment build up until maturity and then the face value can be used to pay off the mortgage early. If, however, the income earner (insured) dies before the endowment matures, the mortgage is paid off anyway.
- Funding Retirement: By paying into an endowment until the maturity date, the face amount can be taken out and used for retirement. It can also be set up to pay out a set amount on a monthly basis, as retirement income. If this option is chosen, income will be taxed as an annuity.
Benefits of Owning an Endowment Plan
One of the major benefits of the endowment plan is that there is a shorter period of time in which payments have to be made into the contract. Upon maturity, the proceeds can be used for the designated purpose. There is no investment risk with an endowment contract. However, the returns, carrying no risk are low.
There is a set amount at maturity no matter what has happened in the economy or financial markets.
Typically, endowment plans do not require medical exams, unless the insured is over 50 and the death benefit (face value) is large. By using an endowment contract, people are more likely to save for education expenses and other needs. It is sort of a forced savings plan, that pays if the insured dies before all the savings have accumulated.
Cons of Owning Endowments
The cons of owning an endowment plan is that the Tax Reform Act of 1984 took away the tax advantages of the endowment. If it is purchased after January 2005, and it endows or pays the face amount to the insured, before age 95, it is no longer consider life insurance. The accumulated cash value or death benefit would be taxed. This act caused many companies to cease offering endowment plans.
If you purchased your endowment contract before January of 2005, it is not affected by the Tax change, and it is still considered as a life insurance contract, whether it pays a death benefit or it matures and the face amount is paid to the insured.
Currently, finding companies that offer endowment contracts may not be easy. If you are considering an endowment, you should compare the cost of insurance versus the savings side of the account to make sure you are getting your money’s worth. Some will guarantee better returns on the accumulation account and charger lower insurance rates, lowering your overall cost of the endowment plan. Compare life insurance quotes instantly by entering your zip code in our FREE tool below!
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