LOUISE FAIRSAVE: Endowment policy
IN A WAY, practically all insurance policies have an endowment; the endowment is the final payout.
For the term insurance policy, the universal life policy and the whole life policy, that payout will occur only on the death of the insured life. For the term insurance policy in particular, there will be no payout/endowment if the insured life survives the agreed term of the insurance.
However, there are specific insurance policies referred to as endowment life insurance policies. This is because such policies always have an endowment and it can be planned for a particular term of the policy. Simply put, an endowment insurance policy provides a lump sum payout after an agreed term or on death if the death of the life insured occurs before the agreed term.
Sample terms of an endowment policy are ten, 15 or 20 years. On buying the insurance for a specific sum assured, the term is agreed and the premium is set so that it will cover the cost of pure insurance, yet have a saving element that builds the value as the policy ages, much like the universal life policy. The sum assured is the amount that will be paid to the beneficiary should the insured life die before the term of the insurance.
Should the policy mature to full term, the endowment will typically exceed the sum assured and this endowment is paid to the beneficiary. The beneficiary can include the person whose life was insured. So this is one insurance policy that you may live to reap its financial benefits.
Each time you pay a premium, the saving component grows in value. Over time, interest is earned by the savings, providing a cash value of the policy on which a cash surrender value can then be computed.
Like the universal life policies, endowment life insurance policies are interest sensitive and the insurance company would tend to offer a guarantee return on the savings component ranging between two to three per cent. These bonus payments are described as reversionary.
The insurance company typically would invest the funds raised from such policies in equity investments (shares in companies) and share the profits.
Where the investment returns to the insurance company are well above the guaranteed rate during the term of the policy, the company may issue additional bonus interest payments on the saving component of these policies at the time of endowment. Such a bonus payment would be described as a terminal bonus. In this way, the endowment at term tends to exceed the sum assured.
Term insurance does not have a saving component within the premium paid and no savings or cash value ever accrues for such policies; there is pure insurance. Universal life policies, whole life policies and endowment life policies all accumulate cash values over time which can be a basis for surrendering the policy or for taking a loan against the value in the policy. Loan interest typically exceeds the interest rate on the savings component by far, making a loan a continuing erosion of the policy value if not repaid in short order.
Typically, endowment policies are formidable tools for funding a specific undertaking planned for the end of the term. For example, funding the cost of university tuition when the child or children reach that age. With the parent as the beneficiary of the policy, then the proceeds of the policy can be available for the child’s education whether the parent lives or dies. However, this way of saving may not be the most efficient.
That is the subject of another article.
Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.