Endowments

Question 1

Endowment Contract vs. Life Policy

Answer 1

A life insurance policy is said to mature, or endow, when its guaranteed cash value equals its face amount. This point is known as the endowment date.

If the insured is still alive at maturity, the cash value is paid to the policyowner and the coverage terminates.

Whole life insurance is correctly defined as endowment at age 120 policy.

An endowment contract is a special form of life insurance in which cash values grow rapidly. As a result, the policy endows well before age 120.

This type of policy pays in two ways:

1. As with any other life policy, if the insured dies before the end of the endowment period, the policy pays a death benefit to the beneficiary.
2. If the policy endows while the insured is still alive, the policyowner receives a specified sum as a living benefit. This is the feature that is unique to endowments.

Question 2

Uses of Endowments

Answer 2

Endowment contracts were once very popular.

They were a guaranteed way to build a predetermined amount of money to use at a future date; often bought to fund children’s education or to provide retirement income.

For these reasons, 10- or 20-year endowment policies, or endowments at age 21 or 65, were very common.

The Decline of Endowments

The popularity of endowment contracts ended suddenly, in 1984, with passage of federal legislation that effectively stripped endowment contracts of their favorable life insurance tax status by defining “life insurance” as a product that endows no earlier than age 100 (since increased to age 120).

All endowments bought after 1986 have lost the benefit of tax deferred cash value growth. A few insurers still make these policies available, and they are sometimes sold in tax-qualified plans. However, the popularity of these policies has greatly decreased.

Question 3

Endowments Are Not Modified Endowment Contracts

Answer 3

Traditional endowment contracts should not be confused with the modified endowment contract (MEC). Created with the same tax legislation that stripped endowments of their favorable tax treatment, MECs are a label assigned to any permanent life insurance policy that is paid-up in seven years or less. (The target of the legislation was the single premium life insurance policy.) MECs lose some, though not all, of the favorable tax treatment enjoyed by life insurance.