An endowment life insurance policy combines term life insurance with a savings program.
Endowment Life Insurance Policies offer guaranteed benefits. They have options such as partial Money Back, Guaranteed in-built Bonuses, and Guaranteed Maturity Values. An endowment policy combines both protection and investments. Some of the protection features include living benefits like; critical illness, permanent and total disability, or loss of use of body parts. Regarding investments-the lesser the protection benefits, the higher the return. The bonuses and maturity terms are what make up the endowments.
One of the most creative ways to plan for investments using an endowment life insurance policy is through the concept of layering (laddering). Laddering is a concept that helps you create a predictable cash flow pattern at know times. You can incorporate this concept into your financial plans like; building a down payment fund, item purchase, school fees fund or even instilling a saving culture into your finances.
How Endowment Life Insurance Policies Work
Generally, the need for this type of policy must fit into your financial plans. That is, you must have a specific need that you want to guard and save for. As such, the policy is period-based, amount-specific and can be incorporated to meet a definite purpose.
The Common Uses of Endowment Life Insurance Policies
- Establishing an education fund: the design incorporates definite; premiums, maturity dates and amounts.
- Establishing a down payment fund: known sum, maturity, and dates.
- Risk management: some offer the best protection benefits.
- Building a Saving Culture: when automated, you could amass life-saving lump sums.
- Tax Efficiency: the monthly premiums qualify for insurance tax relief, and maturities are paid tax-free.
- Succession Planning: in the event of passing on, the sum assured is paid to the nominated beneficiary without hassles.
Key Endowment Life Insurance Terms
- Sum Assured: Is the amount you receive at the end of the period or the maturity value. The sum assured is also payable upon the occurrence of an insured event.
- Capital Sum Insured: This is the maximum value of benefits the policy covers (the total sum of living, life, and maturity sums) and is payable upon occurrence. You will find the specification in the policy schedule.
- Premium: Premium is the amount payable monthly, quarterly, semi-annually, or annually to an insurance company. The premium amount depends on these factors; your age, your health status, gender, and the sum assured you opt for.
- Bonuses: These are also known as partial maturities or cash back. They are usually payable before maturity and at specified intervals and amounts. The bonus calculation is arrived at as a percentage of the sum assured.
- Beneficiary: This is the person who receives the benefits if the policyholder passes on. Choosing a beneficiary ensures that, should you die, the policy benefits go to the right person. If the beneficiary is below the age of 18 years, ensure you nominate a responsible guardian.
- Non-forfeiture options: Given that endowment life insurance policies are savings products, most people ask about premiums refund. Well, in the insurance industry, we do not speak about refunds. However, you will notice a clause called non-forfeiture options. The clause specifies the circumstances under which an insured party can receive full or partial benefits or a partial refund of premiums after a lapse due to non-payment.
What to know about non-forfeiture options
Lapse of grace period: grace period is the number of days an applicant has to decide to proceed with the policy. It can also be the number of days available to an insured party to pay the premium due.
Cash surrender value: the amount payable to the policyholder when they decide to cancel—or surrender their policy. Remember the partial refund mentioned in the introduction? The cash value only builds after the policy reaches a stated number of months.
Automatic Premium Loan: This is an advance to pay premiums on behalf of the policyholder. The aim is to ensure the policy is in force for a stated period. Some companies may also charge interest on the loan. An automatic premium loan is only advanced to policies with a cash value and reduces the surrender value.
Reduced paid-up policy: If a policyholder chooses to stop paying premiums after the policy has acquired a cash value, such a policy is said to be paid up. The policy will remain in force. However, the sum assured reduces. The reason is; the premiums paid do not proportionately represent the initial make-up of the policy.
- Friendly Credit: An endowment life insurance policy as a tool in your financial plan could rescue you in your time of need. These policies provide an avenue to borrow without the much-dreaded need for guarantors and rigorous loan appraisal. Once your policy has built a cash value, all you need to do is to apply for a loan. However, the loan attracts interest and must be repaid – like any other loan. The differentiation is the speed of processing and flexibility in repayment. No questions asked – only keep your end of the bargain.
