Rebecca Lake is a certified educator in personal finance (CEPF) and a banking expert. She's been writing about personal finance since 2014, and her work has appeared in numerous publications online. Beyond banking, her expertise covers credit and deb.
Rebecca Lake Banking ExpertRebecca Lake is a certified educator in personal finance (CEPF) and a banking expert. She's been writing about personal finance since 2014, and her work has appeared in numerous publications online. Beyond banking, her expertise covers credit and deb.
Written By Rebecca Lake Banking ExpertRebecca Lake is a certified educator in personal finance (CEPF) and a banking expert. She's been writing about personal finance since 2014, and her work has appeared in numerous publications online. Beyond banking, her expertise covers credit and deb.
Rebecca Lake Banking ExpertRebecca Lake is a certified educator in personal finance (CEPF) and a banking expert. She's been writing about personal finance since 2014, and her work has appeared in numerous publications online. Beyond banking, her expertise covers credit and deb.
Banking Expert Ashlee Valentine Deputy Editor, InsuranceAshlee is an insurance editor, journalist and business professional with an MBA and more than 17 years of hands-on experience in both business and personal finance. She is passionate about empowering others to protect life's most important assets. Wh.
Ashlee Valentine Deputy Editor, InsuranceAshlee is an insurance editor, journalist and business professional with an MBA and more than 17 years of hands-on experience in both business and personal finance. She is passionate about empowering others to protect life's most important assets. Wh.
Ashlee Valentine Deputy Editor, InsuranceAshlee is an insurance editor, journalist and business professional with an MBA and more than 17 years of hands-on experience in both business and personal finance. She is passionate about empowering others to protect life's most important assets. Wh.
Ashlee Valentine Deputy Editor, InsuranceAshlee is an insurance editor, journalist and business professional with an MBA and more than 17 years of hands-on experience in both business and personal finance. She is passionate about empowering others to protect life's most important assets. Wh.
| Deputy Editor, Insurance
Updated: Sep 26, 2022, 7:00am
Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.
Getty
Endowment life insurance is designed to offer a payout to the policy’s beneficiaries when the insured person passes away, or to the insured person themselves at the end of a set time period. An endowment life insurance policy can act as a savings and investment vehicle, but it’s not right for everyone.
Depending on your financial situation and needs, term life insurance or a permanent policy might be more appropriate. Understanding what it means to have life insurance with endowment can help you to decide if this type of coverage is right for you.
Compare Policies Hassle-Free, No Login
Endowment insurance is a type of life insurance that allows the policyholder to pay premiums and receive money back at a specified date. If the insured person passes away before that date, a life insurance endowment policy can pay out to the beneficiaries instead.
With a traditional life insurance policy, the insurance company pays out a death benefit to the beneficiaries only when the insured passes away. There may be an exception to this rule if the policy includes an accelerated death benefit rider, which would allow the insured to receive some of the death benefit early to cover their end-of-life care.
Endowment life insurance can act as a savings vehicle, since part of the premiums paid are invested to earn interest. That’s similar to the way permanent life insurance that accumulates cash value works. There are, however, some differences in the way that endowment life insurance functions.
A life insurance endowment policy works by allowing the policyholder to collect a payout at the end of a specified contract period. If the insured person dies before the contract period is over, their beneficiaries receive a death benefit.
When you purchase an endowment life insurance policy, it will have a set term during which you’ll pay premiums. The term depends on the policy and can be as short as five years or last up to 30 years. Endowment policies can also be structured to cover you up until you reach a certain age.
As you pay premiums, part of the money goes toward funding the policy’s death benefit but some of it is invested. The premiums you pay can depend on the policy’s benefit amount and the contract term. The shorter the term, the higher the premiums tend to be.
If you’re still living at the time the contract ends, the insurance company pays you the face value of the policy. You can receive a lump-sum payment or a series of installment payments, depending on how the policy is structured. If you pass away before the contract ends, your beneficiaries collect a payout instead.
Generally speaking, life insurance is designed to provide financial benefits to your loved ones after you’re gone. With endowment life insurance, you can reap the benefits of the policy yourself if you outlive the contract term.
In terms of the advantages, here are some of the reasons you might consider an endowment policy:
So why would someone think twice about this type of insurance? There are downsides associated with endowment life insurance coverage:
Endowment life insurance also has some drawbacks if you decide you’d like to cancel the policy early. While you may be able to get out of the policy before the end of the contract term, the insurance company may charge a steep surrender fee to do so. And any cash value you’re able to receive from the policy may be much less than what you’ve paid in premiums.
At first glance, endowment insurance can seem appealing since you or your beneficiaries are guaranteed to receive a financial benefit and the policy can double as an investment fund. However, it’s important to consider whether your needs might be better met by another type of life insurance or savings vehicle.
For example, some common uses for endowment life insurance include retirement savings and college savings. You might structure your policy to pay money back to you at age 65, for retirement, or after 15 years, by which time your kids might be headed off to college.
What you have to keep in mind is how your money will have to grow over the contract term and what kind of tax benefits you might be able to reap by investing elsewhere.
A traditional Individual Retirement Account (IRA), for instance, can offer tax-deductible contributions and tax-deferred growth. A Roth IRA can offer tax-free qualified distributions, or withdrawals. You can invest in mutual funds, exchange-traded funds (ETFs) and other securities, all of which might outpace the growth generated by an endowment policy.
With a 529 college savings account, you can choose from a similar range of investment options. While there’s no federal tax deduction for contributions, your contributions can grow tax-deferred. Withdrawals are tax-free when the money is used to pay for qualified higher education expenses.
If you still need life insurance, there are other options you can explore, including term life insurance and whole life insurance. With term life, you’re covered for a set time period. With whole life, you’re covered for your natural life as long as premiums are paid. Some whole life policies can also accumulate cash value that you can borrow against during your lifetime.
Endowment life insurance can fill a specific gap in your financial plan, but it’s important to understand how much you’ll pay for it and what kind of value you’ll receive in return. Work with a financial advisor to figure out whether endowment life insurance is the best fit for your overall financial plan.
Compare Policies With 8 Leading Insurers
