Do You Need an Endowment Insurance Policy?
An endowment insurance policy offers an alternative to a savings account, but whether the cost and payout are worth it depends on your financial situation, goals, and preferences.
Like other types of permanent life insurance, endowment policies are a balance of security and investment. They provide reasonable coverage while investing your money and offer a guaranteed lump sum payout, called an endowment, at the end of the policy term. They suit individuals with specific savings goals, such as providing an education for their children, funding an expensive trip, or acquiring real property. As a low-risk investment insurance policy, however, the returns may not be as substantial as those provided by other options and the coverage may not be sufficient.
Defining Endowment Insurance Policies
Like any other insurance policy, endowments require regular premium payments. Unlike basic term life insurance policies, however, the entire payment does not go toward paying for coverage. Instead, a portion of it is invested. As a result, you may be entitled to receive more than the "sum assured," or the guaranteed return, at the end of the policy term. However, the additional payout depends on type of endowment policy and the performance of the investment products to which your premium payments have been allocated (to find out more about the investment component of insurance policies, see Insurance as an Investment? It's Called Permanent Insurance).
These types of policies typically span a period of 10 years.
Why Buy an Endowment Insurance Policy?
Although endowment insurance policies have declined in popularity and the options are likely limited, they do have some pros that may make them a sensible option for you.
Forcing Yourself to Save
Saving is a common problem among parents in their late twenties to early thirties. For example, statistics show that 7 out of 10 American families with parents aged 25 to 32 prefer to eat out rather than prepare meals at home. In a highly commercialized world where this kind of consumerism is encouraged, parents are in need of ways to force themselves to save. Since endowment policies require regular payment of premium to keep them from lapsing, they may help develop the discipline to save and invest a portion of one's income.
Pursuing Individual Savings Goals
Some people have individual savings goals. Are you looking to tour Europe by the time you hit 40? Do you intend to finally move into a home that you own in 10 years? If so, endowment life insurance may suit your needs. Each premium payment takes you one step closer to your goals. And you get to work for your goals securely, without fear for your beneficiaries in the event that something bad happens to you.
Possibility of a Profits Investment
Endowment insurance policies usually provide the option of a with-profits investment arrangement. These are designed to increase in value through bonuses that work much like dividends in equity when you purchase stocks of a corporation. For example, if you pay $100 a month in premiums to your with-profits endowment investment policy and you have agreed to terms wherein 30 percent of your premium pays for life insurance coverage and the rest goes into investments, you will end up with 70 shares in a trust fund where the net asset value per share is $1.
A with-profits arrangement allows for the declaration of dividends in the event of a spike in the net asset value per share. For instance, should the investment manager find that the value per share in the trust fund has tripled to $3 and is no longer being purchased due to the high price of shares, 2 bonus shares will be awarded to holders of with-profits insurance policies for each share that they own. These bonuses usually cannot be taken away, even with a subsequent dip in the value of the portfolio. Forfeiture of bonuses only occurs if the policy is prematurely terminated due to market value adjustment.
Disadvantages of an Endowment Insurance Policy
Besides the cons presented below, keep in mind that other investments with higher risk promise much larger payouts and other life insurance products may combine savings, investments, and death benefits in a package that can better benefit you.
Limited Access to Your Money
Endowment insurance policies require financial discipline. The money you put into the policy in the way of premiums is not easily accessible prior to the end of the policy term. It is important, then, to maintain liquidity while deciding on an endowment insurance product. Make sure that the premium payments are not an amount that you will struggle to pay on a regular basis. If you foresee any termination of the source of income you would rely upon to make premium payments, it may be wise to put it off. Moreover, if you presently have an endowment insurance policy and are considering premature termination due to lack of income to pay premiums, take time to find contingencies.
Penalties and Charges
Due to the high payout of endowment life insurance policies at the end of the term, insurance companies typically impose penalties and charges for delinquent payment of premiums as well as premature termination of the policy. These penalties and charges are significant enough to offset a portion of the benefits of owning an endowment insurance policy.
Before acquiring an endowment insurance policy, it is best to consult with your insurance provider to determine whether or not your present financial situation is secure enough for you to obtain the policy. Moreover, it is also wise for you to be transparent with your beneficiaries, that you are acquiring an endowment policy they stand to benefit from at the end of the term or should anything bad happen to you. This allows you to have a fallback position in the event that you suddenly struggle to pay premiums.
Carefully weigh the pros and cons before you make the leap to purchasing an endowment insurance policy. If you decide to purchase, make sure to evaluate your insurance provider. If your provider has a long-standing reputation of providing quality endowment life insurance products, your money is in good hands. The value of your endowment insurance policy is dispersed across different companies depending on the contents of the portfolio that your premium payments are invested in. This allows your product to be more resilient to fluctuations in the market. Finally, your money is in the hands of competent portfolio managers who constantly work to ensure growth over time.