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Endowment life insurance

A life insurance policy is a certain kind of long-term investment, but one that you yourself as a policyholder won’t necessarily take benefit of. The payout made out upon collection might be for possible mortgage obligations, or financial relief for your dependents after your passing. Indeed, a payout might not even be guaranteed after all those monthly payments if the life insurance policy has a maximum age or policy duration, after which the life insurance payout is no longer collectible. If you are looking for a product that has both the features of a life insurance policy and a more traditional investment vehicle, then endowment life insurance could be for you. This article looks at what endowment life insurance policies are and how they work.

What Is an Endowment Life Insurance Policy?

There are some people who find life insurance policies too restrictive, not giving policyholders the financial returns they are looking for with that kind of long-term financial commitment. There is a more flexible alternative to this if you are looking for something that might give dividends within your lifetime: endowment life insurance. So what is this?

In simple terms, endowment life insurance will provide you with the traditional features of a life insurance policy but also a long-term investment vehicle similar to that of a savings account.

If you purchase an endowment life insurance policy, you have not only obtained financial security for your dependents and long-term loan obligations in the event of your death, but also have an investment vehicle that pays a lump sum after a specific term (upon “maturity”). The maturity terms typically seen are up to a certain age limit or can be anything from ten to twenty years.

This kind of policy is paid into like you would a regular saving plan, but unlike a traditional saving plan, a payout will be triggered if you die before the end of the term agreement. Acting as an investment plan and covering the policyholder like life insurance means this is an effective long-term saving strategy for many. There are a variety of endowment life insurance policies available, all catering to different personal circumstances and risk appetites. We will look at these further below.

How does an endowment life insurance policy work?

Endowment life insurance gives policyholders the security of a traditional life insurance policy and the potential monetary gains of a long-term investment plan.

Funds and any profits made are distributed back to the policyholder after a specific amount of time has passed and the policy has reached its maturity date. A lump sum is also paid out to the policyholder’s elected beneficiaries or estate if they have passed away before this time.

Payments are made on an annual or monthly basis, upon which the funds are split, being allocated between the life insurance part of the policy and the investment side. The amount of payout received from the investment element will come down to how well those funds have been invested.

Depending on the provider, you might also be able to surrender your policy at any time. At that point the provider will pay a fair value based on the premiums you have paid into the account and the performance of your investment fund. Should you surrender the policy, it would be wise to make sure you have a sufficient amount of life insurance covered elsewhere, since you would be giving that up as well.

Different Types of Endowment Policies

There are several types of endowment policies that one can choose from.

The most common endowment life policy is the “traditional with profit endowment”. These are designed to pay a certain amount of money upon maturity, plus bonuses if investments have performed well and generated a profit. How is this profit calculated? The money you pay in is pooled with the money from other people’s policies, and then invested. After the costs of running this fund are paid, any profits leftover will be distributed to the insurance company’s policyholders. These profits are added to your policy as annual bonuses and will depend on the performance of the investments made in the “with-profits” fund. In addition to an annual bonus, you should also receive a “terminal bonus” upon policy maturity.

You can also choose a “unit-linked endowment”. Here, the policyholder’s premium buys units in a fund chosen by the policyholder. This fund might be run by the life provider themselves. These policies have a higher risk/reward profile than the traditional with-profit endowment. This is because how much your endowment pays on maturity is completely linked to how well those investment funds have performed. Furthermore, the value of your investment can not only increase but decrease too.

Should I get endowment life insurance?

There are a couple of reasons why endowment life insurance could be for you. It might be that whilst your loved ones will be in need of some financial security in the event of your death, you also want to see some benefit made of your savings, in your own lifetime. Functioning both as a life insurance plan and an investment vehicle, endowment life insurance can meet both of those needs.

You might also be looking for a low risk saving tool in order to meet a long-term investment goal. The performances and risk appetite associated with these endowment plans are moderate and usually consistent (depending on the plan you choose to purchase), especially when purchased over a long period of time. Of course, the value of investments can go up and down, but the risk here is less than many other alternatives, and comes with added benefit of life insurance.

What’s the difference between endowment and whole of life insurance?

Endowment and whole life insurance policies are designed to pay a lump sum to the policyholder’s beneficiaries upon their passing. However endowment life insurance policies will come with a maturity date, so that at this point dividends can be drawn and the policy effectively cashed out to the benefit of the policyholder.

A whole of life insurance policy will last for the entirety of the policyholder’s life and only pay a benefit upon the policyholder’s death. Here only the policyholder’s beneficiaries (rather than the policyholder themselves) are able to claim the benefit.

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