Endowment life insurance combines life insurance with a savings plan. You can choose how long you want the endowment life insurance protection to last. If you pass away before the maturity date, your heirs receive the insurance death benefit. If you live past the maturity date, you get a large payout from the insurer.
While this specialized insurance product could serve as a long-term savings plan, there are also drawbacks. Here’s what to know about costs and other factors before you buy endowment life insurance.
Key Takeaways
- Endowment life insurance policies combine temporary life insurance with a savings plan.
- The endowment coverage term can last a set number of years or until you reach a target age.
- Your heirs receive the insurance death benefit if you pass away before the maturity date.
- You receive a large payout with a guaranteed return if you live until the maturity date.
- The endowment payout could be helpful for college savings or retirement. However, the return is not as high as other accounts provide.
What Is Endowment Life Insurance?
Endowment life insurance is a temporary type of life insurance. These policies do not last your entire life. Instead, you pick how many years you want the policy to last, known as the term. You could also set a target date depending on your savings goals.
For example, you could choose coverage that lasts until you turn 65 so you could use the money for retirement. Or you could plan for the coverage to end when your children reach college age so you could use the money for college expenses.
If you die before the policy maturity date, your heirs receive the life insurance payout.However, if you live until the target date, you’ll receive a guaranteed lump sum payment called the endowment.
This is different from other life insurance policies like term life insurance. Term life insurance is also temporary, but when the coverage ends, you don’t get a large payment back. Some term policies refund your premiums, but this is still much lower than the payout you would receive from endowment life insurance.
Note
If you collect the endowment payment to use for your child's college education, it will count against their financial aid eligibility in the same way as having more cash in the bank does. However, the endowment won't factor into financial aid eligibility while it's still growing in the life insurance policy.
How Does Endowment Life Insurance Work?
When you sign up for endowment life insurance, you choose the size of your death benefit and how long you want the coverage to last. You also choose how much you want to receive at the end of your policy for the endowment payment.
You’ll then pay premiums to keep your coverage active. Part of these premiums will pay for your insurance coverage. The insurer will invest the rest to earn you a guaranteed return for the future endowment payment.
The shorter the term of your endowment, the more expensive the premiums and the less time you have to build up savings for your target payout.
When the term ends, you no longer have to make premium payments, but you also lose your life insurance coverage. You don’t owe income tax while your money grows in the endowment life insurance policy. When you receive the final payout, you owe income tax on any amount you receive in excess of what you paid in premiums.
Advantages and Disadvantages of Endowment Life Insurance
Advantages
Combines life insurance with savings
Guaranteed return and payout
Customizable
Disadvantages
Expensive premiums
See AlsoEndowmentLow returns
Life insurance protection expires
Advantages of Endowment Life Insurance Explained
Combines life insurance with savings: With endowment life insurance, you get life insurance coverage plus a long-term savings plan. You protect your loved ones if you pass away while also building a large payout for future goals like college tuition or retirement. This conveniently covers multiple goals all for one monthly premium payment.
Guaranteed return and payout: When you apply for endowment life insurance, either your heirs will receive the death benefit or you'll receive the endowment payout by the end of the policy. The insurer guarantees a return that grows your savings.
Customizable: You choose how long you want your endowment life insurance to last and when you want the final payout. You can set a date based on when your child reaches college age, when you turn 65 and want to retire, or another financial goal.
Disadvantages of Endowment Life Insurance Explained
Expensive premiums: Endowment life insurance policies are generally more expensive than permanent life insurance, especially if you want to pay off the policy in a few years. You pay much more for the same size death benefit versus a term policy, even compared to permanent life insurance policies.
Low returns: While the returns for endowment life insurance are guaranteed, they aren’t very high. You might not grow your savings enough to keep up with inflation. You could potentially make much more by investing money in the stock market or even bonds.
Life insurance protection expires: Endowment life insurance does not last your entire life. Once you reach the maturity date, your coverage ends. You could try applying for another policy if you still need life insurance. However, you aren’t guaranteed to qualify because you would need to pass medical underwriting again at an older age.
Alternatives to Endowment Life Insurance
Before signing up for endowment life insurance, consider how you could also cover your financial goals using these alternatives.
529 Plans
529 plans are college savings plans. You add money to the account for a young family member or other loved one. You grow your savings using investment funds of stocks, bonds, and other assets. While the return on a 529 plan is not guaranteed, it can be much higher than an endowment policy if your investments do well.
You do not receive a federal tax deduction for adding money to a 529 plan, but you could get a state tax deduction depending on where you live. Adding money to an endowment is not tax deductible, either.
However, while any money in your endowment that exceeds the amount of premiums you've paid is taxable, money from a 529 plan spent on qualified college expenses, like tuition and room and board, is tax-free.
You owe income tax and a 10% penalty if you spend money in a 529 plan on anything other than qualified college expenses. With endowment life insurance, you owe taxes on your gains, but you can spend the money on anything without a penalty.
An Individual Retirement Account (IRA)
An IRA is an investment account for retirement.Your returns aren’t guaranteed, but if your investments perform well, you can potentially earn much more than you would earn with endowment life insurance.
An IRA delays taxes on your gains while the money is in your account. This is similar to endowment life insurance. However, an IRA offers more tax breaks. There are two different types of IRAs: traditional and Roth.
With a traditional IRA, you get an upfront tax deduction for adding money, but you then owe income tax when you take money out in retirement. With a Roth IRA, you don’t get an upfront tax break, but your retirement withdrawals are completely tax-free, including gains.
With an IRA, you can generally only to make withdrawals after you turn 59½, or else you could owe an early withdrawal penalty. Endowment life insurance could let you set an earlier age for your retirement lump sum payout.
Other Life Insurance Policies
Term life insurance is temporary coverage that is usually significantly more affordable than endowment life insurance. However, at the end of the term, you typically don’t get any money back. You need to build your savings another way.
Permanent life insurance like whole life, universal life, and variable life also includes cash value to build savings. You can take this money out while you're alive to cover college expenses and retirement. With permanent life insurance, the coverage lasts your entire life. You don’t build the payout as quickly as with endowment life insurance, but you can keep your insurance protection.
Is Endowment Life Insurance Worth It?
Endowment life insurance could be worth it if you want to combine temporary life insurance that builds a large, guaranteed payout while you’re still alive. You’re covering multiple financial needs in a safe, predictable fashion.
Still, endowment life insurance is expensive, especially for short-term policies and those with a large death benefit. The returns are lower than what you could get by investing. You’re giving up a lot of growth potential in exchange for the endowment guarantees.
What Are the Risks of an Endowment Policy?
Since endowment policies are expensive, one risk is that if you ever cannot afford your premiums, you lose your insurance protection. There’s also the risk that with these policies, you can’t afford to buy enough insurance to cover your family properly. Finally, there’s the risk that the endowment return will not grow your savings quickly enough to keep up with inflation.
What Happens to an Endowment Policy if You Stop Paying?
If you stop paying for an endowment policy before the target expiration date, the insurance company will cancel your coverage early. You may receive a partial amount back depending on how much you paid into the policy, known as the surrender value. The insurer would tell you the surrender value of your endowment policy.
What Does Endowment at Age 65 Mean?
Endowment at age 65 means an endowment policy set to mature when you turn 65. If you live to age 65, you receive the lump sum payment from the policy, which you can use for retirement. If you pass away before turning 65, your heirs receive the endowment life insurance death benefit.
The Bottom Line
Endowment life insurance can seem convenient because you combine life insurance while saving money for other financial goals. But you’re paying a lot for that convenience. Before signing up for such a costly policy, ensure you’ve adequately compared it against your other options. It may make more sense to use less expensive life insurance policies like term life insurance with college and retirement savings accounts and invest the difference in cost.
