When shopping for life insurance, you have a choice between term insurance or a permanent plan, such as whole life or universal life. One type of whole life policy that is no longer available is the endowment policy, which offered the feature of paying the death benefit while the policyholder was still alive. Term policies and endowment life are two very different life insurance products, although both could be purchased to cover a specific time frame.
A term policy provides life insurance protection only and does not accumulate cash value. As a result, term insurance is typically less expensive than permanent plans, such as endowment life. You may consider purchasing a term policy for a specific purpose, such as to cover a home mortgage or to provide life insurance protection until your kids leave the household and your financial obligations decrease. The low cost of term insurance makes it an attractive choice if you need coverage, but don't have much money to spare.
Endowments differ from traditional whole life in some important ways. With whole life, the coverage is designed to last for the rest of your life and you probably won't outlive the policy. If you live to the end of the policy term, which is typically age 95 or 100, you receive the entire death benefit. With an endowment, the policy period is much shorter, such as 20 years or until age 65, meaning there's a good chance the policy will "endow" and you will receive the death benefit while you are still alive. Consequently, endowment policies carry much higher premiums than traditional whole life policies.
Term insurance offers little in the way of tax consequences. When you die, your beneficiary receives the policy proceeds on a tax-free basis. Endowments, on the other hand, can have severe tax ramifications. The Tax Reform Act of 1984 stipulates that any life insurance policy issued after 2005 that endows, or pays the death benefit to the owner prior to the age of 95, results in the owner having to pay taxes on the death benefit and cash accumulation fund. As a result, the endowment policy as it was known in the past no longer exists.
Because you can no longer can purchase a true endowment policy, if you're shopping for life insurance you must choose between term insurance and other forms of permanent plans. If you prefer a plan that builds cash value, while offering insurance protection, a permanent life policy may appeal to you. Another strategy is to purchase a term policy and invest the premium savings into a vehicle such as a mutual fund.
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