Endowment Insurance Basics

Posted in Life Insurance

January 12th, 2009

An endowment insurance policy is a life insurance contract that is designed to mature at a specific time and pay benefits to the insured while the insured is still alive. In the case of the death of the insured, benefits will be paid in a lump sum to a beneficiary. Typical endowment terms are 10, 15 or 20 years, or maturity upon reaching a certain age. Some policies also pay out in the case of critical illness.

Endowment insurance is a form of whole life insurance. Like other forms of whole life or permanent insurance, part of the premium is invested to build up a cash asset fund. The primary benefit of choosing an endowment policy is that the policy holder stands to collect benefits during their lifetime, provided that they live out the term specified in the policy. Therefore, it is generally considered to be primarily an investment and only secondarily a form of life insurance. However, it still provides benefits to dependents in the event of a policy holders death. Endowment policies generally carry a higher premium than other whole life policies for the same amount of insurance, because more of the premium is devoted to building cash value.

Endowments can also be cashed out early, or surrendered, before the term expires. In that case, coverage ends and the policy holder receives the surrender value of the policy, which may be determined as less than the face value, depending on how long the policy has been in force and how many premium payments have been made. In the event that the policy is cashed in at a time when investment conditions are adverse, the encashment value may also be reduced by a market value adjuster if the investments on the cash asset portion of the policy have performed poorly. In this case, the surrender amount would be adjusted and the policy holder would receive the surrender value, less the adjusted market value.