Endowment life insurance
Looking for life insurance? Find out what life insurance with endowment savings is, how it works and who can benefit from it.
Endowment life insurance provides a more flexible approach to life cover, where your policy acts both as long-term life insurance and as an investment vehicle.
You can use an endowment life insurance policy to save up for major expenses, while still maintaining the security of a payment to your loved ones in the event of your death.
What's in this guide?
- What is an endowment life insurance policy?
- How does an endowment life insurance policy work?
- Should I get a life insurance endowment plan?
- What is life insurance with endowment savings?
- How to get endowment life insurance
- What are your options if you have an endowment policy?
- What types of endowment policy are there?
- Difference between endowment and whole of life insurance
- Bottom line
- Compare life insurance providers
- Frequently asked questions
What is an endowment life insurance policy?
An endowment policy is a long term investment that includes life insurance cover.
Payment works in a similar way to regular life insurance in that you pay the provider a set amount monthly or annually. When the policy matures, usually after between 10 and 25 years, you get a cash lump sum. Some policies even include critical illness cover.
However, an endowment life insurance policy also has an investment element, so can act as a way to earn extra money from your savings (though, like with all investments, there is an element of risk involved too).
How does an endowment life insurance policy work?
An endowment policy serves a dual purpose. In one way, it works like a regular life insurance policy, so, if you die before the end of the term, your beneficiaries will receive a payout.
The difference between a regular life insurance policy and an endowment policy is that, unless the policyholder dies before the end of the policy term, the payout is handed out when the policy matures, usually up to 25 years from when it was first taken out, even if the policyholder is still alive.
Another element unique to endowment insurance is that your monthly or annually payments are only partly used to purchase life assurance. The remaining funds are then invested into the stock market, and the lump sum payout amount you get at the end of your insurance term depends on how well your investments perform.
Should I get a life insurance endowment plan?
Some scenarios where you might consider taking out an endowment life insurance policy are:
- You want to save up for a big payout on the policy’s maturity, to use as a retirement fund, to reinvest elsewhere or for a particular long term goal (like a holiday home abroad, for example).
- You want to invest, but keep your risks low and get a guaranteed payout on a set date (as long as you keep your premiums up to date).
- You want to combine your life insurance with an investment vehicle into one.
- You understand and accept the risks of investing, and that the market can go both up and down.
What is life insurance with endowment savings?
Life insurance with endowment savings means a policy that combines life cover and investment, but focuses more on investments.
You put a set amount into the policy every month or year and, at the end of the policy term, you get a lump sum payout. However, unlike a regular savings account, your funds are invested in the stock market, which means they can grow more than with just the interest offered by a standard bank account. On the flip side of that, they can also reduce if the market crashes.
How to get endowment life insurance
If you’re looking to get an endowment policy, you should first decide what type of policy you would like (you can learn about the different options below).
Once you’ve made a decision, you should shop around the market and compare policies to find the best option for your needs. You can also seek the advice of an independent financial advisor.
What are your options if you have an endowment policy?
An endowment policy offers several options for payout:
- Wait for it to mature. You can keep paying in to your policy until it matures, then get a lump sum payment, even if you’re still alive.
- Stop making payments. Some insurers will allow you to stop paying towards your endowment policy, but still keep it until it matures. This means that both the lump sum you get when it matures and the payout your beneficiaries will get if you die could decrease over time.
- Surrender your endowment. You can cancel your policy before it matures and get a payout from your insurer. The amount you get would be much lower than if you wait for the policy to mature.
- Sell your endowment. Selling your endowment to a private investor or company can get you a bigger payout than your insurer would give you if you surrender it.
What types of endowment policy are there?
There are four main types of endowment policies:
- Non profit endowment policies. This type of policy pays a set amount when it matures, like the full cost of your mortgage, for example. Premiums are usually cheaper than other types of endowment policies.
- With profit endowment policies. With profit policies still pay out a set amount on maturing (for example, enough to pay off your mortgage), but they also pay an extra amount if the investments made a profit. Note that, if the investments don’t perform well, you might actually get less money than you need to cover your mortgage, or other debts you wanted the policy to cover.
- Unit linked endowment policies. This type of policy relies only on the success of your investments, without the additional security of a set lump sum. You can usually choose which funds you invest in and change them during the policy’s term.
- Whole of life endowment policies. Whole of life policies don’t mature after a set number of years, but instead cover you for your whole life. This means that the payout will only be handed out when you die, so that your beneficiaries can cover your mortgage if it’s not paid off, pay for your funeral, or use the money for other expenses.
Difference between endowment and whole of life insurance
You can get whole of life policies with an endowment (meaning, investment) option. The main difference between regular endowment policies and whole of life policies is that endowment policies mature after a certain number of years. This means that you get a lump sum payment at the end of the policy terms (usually between 10 and 25 years), even if you’re still alive.
Whole of life policies cover you for your entire life, and so only pay out when you die. Your beneficiaries can use the money in whatever way they choose (unless the policy is specifically linked to your mortgage and it’s not paid off yet).
Like with a regular investment portfolio, taking out an endowment policy poses a risk, as the market can fall as well as rise.
If you’re willing to take the gamble, you could end up with a better payout, but be sure that you understand the risk involved.
If you want to guarantee your loved ones get at least a certain amount when you die, or at the end of the policy term (whichever comes first, unless you take out a whole of life policy), then opt for a policy that comes with a set payment, and with the investment profits an extra on top of that.
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Frequently asked questions
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