Life Insurance Endowment Policies
Life insurance policies are typically classified as term, meaning you purchase coverage for a specific period of time without accumulating cash, or permanent, which is more expensive but offers the added benefit of building cash over the life of the policy. A variation of a permanent plan is a type of whole life policy known as an endowment contract, where the coverage is paid in full in a relatively short time frame.
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Identification
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With a regular whole life policy, you theoretically pay the premium until the age of 100, or 120, depending on when the contract was purchased, at which time the policy "endows." This means the coverage terminates and you receive the full face amount of the policy. True endowment policies are whole life policies that cover a shorter period of time, such as 20 years, or until reaching age 65. The shorter term means endowments greatly increase your chances of receiving the face amount of the policy.
Considerations
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Endowments may be attractive if you feel you only need the coverage for a specified time period and want the advantage of receiving a large lump sum of cash, assuming you survive to the end of the endowment period. However, because of the shorter payment period, endowment policies require a much larger premium, which makes them unaffordable for many individuals. If you still need life insurance at the end of the endowment period, you may have difficulty obtaining coverage due to your advanced age and the higher premiums as a result.
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Single-Premium Whole Life
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A variation of an endowment policy is single-premium whole life. As its name implies, with single-premium whole life, you make one lump sum premium payment when you purchase the policy, often $5,000 or more, and no further premiums are required. The amount of coverage you can purchase is based on your age and the amount of the initial premium. Part of the initial premium covers the insurance costs, while the rest earns interest at a fixed rate.
Modified Endowment Contracts
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A single-premium whole life policy is not considered a true endowment because, like regular whole life, you don't receive the face amount of the policy unless you're fortunate enough to live to 100 or 120. However, it does qualify as a Modified Endowment Contract. A MEC is defined as a life insurance policy that is paid in full in seven years or less. A MEC is considered as much of an investment product as life insurance due to the more rapid accumulation of cash, so it does not offer the benefit of tax-free withdrawals from the cash value prior to reaching age 59 ½.
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References
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Comments
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life insurance is soooo confusing to me!
