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What is Endowment Life Insurance?

Term life insurance offers cost-effective premiums, temporary coverage, and no cash value. Permanent life insurance does provide cash value, but premiums can cost more. Endowment life insurance can serve as a middle ground between these policies. This policy type combines the fixed length of term life insurance with elements of permanent life insurance’s cash value component. This article will explain endowment life insurance, its pros and cons, and some alternatives to help you find the best financial tool for your needs.

What is an endowment life insurance policy?

Endowment life insurance is temporary life insurance that combines elements of term life insurance and a savings account. You select the policy term, usually ranging from five to 30 years.1 Part of each premium helps fund the death benefit. However, the insurer invests some of your premiums into conservative investments to earn a return.

If you pass away during the policy term, your beneficiaries will receive a death benefit payout. However, if you outlive the policy, you can receive a lump sum from the savings account called an endowment, which is equal to the death benefit.2

Pros and cons of endowment life insurance

Here are some pros and cons of endowment life insurance:

Pro: Guaranteed payout and return

Endowment life insurance guarantees a payout whether or not you outlive the policy. The death benefit protects your loved ones if you pass away. However, you receive a payout if you outlive the policy term. You can use this for anything, from recouping premiums paid to covering daily expenses.

Pro: Minimal risk

Endowment life insurance is designed to help minimize risk for policyholders. As long as you pay premiums for the duration of the policy, you or your loved ones will receive a return on the premiums paid. Furthermore, the endowment is invested in conservative investments to guarantee that you receive a payout.1

Pro: Customize based on your coverage needs

Endowment life insurance lets you customize various policy aspects to fit your needs. You can select different policy term lengths depending on how long you need coverage and choose the size of your death benefit.

Furthermore, you can add riders to give yourself additional coverage. For instance, you can add an accelerated death benefit rider if diagnosed with a qualifying significant illness. This will let you access the death benefit before you receive the endowment payout to help you cover treatment costs and replace lost income.

Con: High premiums

Endowment life insurance tends to charge high premiums since the insurer guarantees a payout.2 Before selecting an endowment life insurance policy, it’s crucial to weigh the higher costs against the peace of mind of a guaranteed return.

Con: Low returns

The insurer invests your premiums in safe investments, which means returns may be smaller. Therefore, it may not be a good option if you’re seeking more potential growth and have a risk appetite for it.

Con: Coverage expires

Once your endowment policy’s term ends, you’ll need to purchase a new life insurance policy if you would like to continue your coverage. This will involve higher premiums and may necessitate another medical exam, unless you choose a no-exam life insurance policy.

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Is endowment life insurance right for me?

Endowment life insurance works well for specific situations. Consider the following factors when evaluating if it’s right for you:

  • Whether you want a payout while alive: Most life insurance policies don’t let you access a death benefit payout while alive. If you want to receive a payout before passing away, such as to help pay for your child’s college education, an endowment policy may work well.

  • Your life insurance budget: Endowment life insurance tends to cost more than term life insurance for the same level of coverage to account for the guaranteed payout. Therefore, consider avoiding these policies if you don’t want to pay more in premiums.

  • Your risk appetite: The guaranteed payout and investments that earn a steady rate of return makes these policies well suited for those with low-risk appetites. However, if you prefer investments offering more potential growth, you may consider alternative options.

Alternatives to endowment life insurance

If endowment life insurance doesn’t seem right for you, consider these alternatives:2

Traditional life insurance

A range of life insurance options exist to suit different needs. Each can be customized in terms of death benefits and optional life insurance riders. Term life insurance may work best if you don’t need lifelong coverage or a wealth-building tool. You can invest the money saved on premiums in other assets to potentially earn higher returns.

On the other hand, permanent life insurance policies, like whole life insurance, can suit you better if you’re willing to pay for lifelong coverage and want to build wealth through the cash value growth component.

529 plan

529 plans are tax-advantaged college savings accounts that can help you cover future education costs for you or your child. Contributions are not pre-tax, but growth is tax-deferred, and withdrawals for qualifying educational expenses, such as college tuition, are generally income-tax-free at the federal and state levels.3 Therefore, these plans may work better than endowment life insurance if your primary goal is to help pay for your child’s education.

Individual retirement account (IRA)

Individual retirement accounts, or IRAs, let you save more for retirement outside your employer-sponsored retirement account. These accounts offer a wider range of investment choices than workplace accounts and are available through banks, brokerages, and other financial institutions. There are two main kinds of IRAs:

  • Traditional IRA: You can deduct contributions from your taxes. Qualifying retirement withdrawals after age 59½ are taxed at your ordinary income rate. You must take Required Minimum Distributions starting at age 72.4

  • Roth IRA: You can’t deduct contributions from your taxes. However, qualifying retirement withdrawals are tax-free. You can also withdraw contributions, but not gains or earnings, without taxes or penalties before age 59½. Withdrawals are not required until after the owner passes away since the heir must take the withdrawals.4

Overall, investing in IRAs may offer more potential gains through investment growth and tax benefits than what an endowment life insurance policy could pay out.

Taxable investment account

Taxable investment accounts, also called brokerage accounts, let you invest in an array of securities, such as stocks, bonds, ETFs, and mutual funds. Contributions are not pre-tax. When you earn dividends or interest or sell investments for a gain, you may also owe taxes, even if you don’t withdraw funds. However, you can withdraw funds whenever you want.

Like IRAs, taxable investment accounts offer more flexibility than endowment life insurance. You can invest based on your risk appetite and desired return potential. The ability to withdraw whenever makes these accounts more viable for help in covering unexpected expenses or helping save extra for significant goals.

Explore Aflac’s life insurance policies

Endowment life insurance can be an attractive way to combine term and permanent life insurance elements since it guarantees a payout regardless of whether you outlive the policy. However, it also has some downsides. Premiums are higher than term life insurance, yet coverage doesn’t last for life like permanent life insurance.

If you’re considering alternative options, Aflac offers whole and term life insurance policies that we can tailor to your needs and budget. Speak with an agent today to learn more about your options and get a quote.

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