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Endowment policies are life insurance contracts that provide the insured with a living benefit that takes the form of a cash payment. A policyholder can cash in an endowment policy by completing and submitting withdrawal paperwork to the insurance company that wrote the policy. In some countries, such as the United States, policyholders can also cash in an endowment policy by contracting the agent who sold the contract.
Simple life insurance policies provide contract beneficiaries with a cash payout upon the death of the insured. The insurance company funds these payouts by requiring policyholders to pay monthly premiums. Endowment policies work similarly except that monthly premiums are usually larger and some firms even charge the premium in the form of a single lump sum payment. A portion of the premium goes towards providing life insurance benefits but the remainder of the premium goes into a cash account that pays either a fixed or a variable rate of return. Typically, a policyholder can cash in an endowment policy at a specific point in the future.
In some instances, endowment policy premiums are invested in simple interest accounts in which case the funds can be quickly accessed when the policyholder makes a withdrawal request. Some insurance companies invest premiums in mutual funds or securities accounts in which case a broker must sell the securities when the policyholder makes the request to cash in the policy. Securities laws vary but in many countries, it takes three days or more for the selling party to receive the proceeds from a securities sale. Thereafter, the insurance firm must disburse the proceeds to the policyholder so the entire withdrawal process can take more than a week to complete.
Endowment policies vary from country to country. In the United States, policyholders cannot normally cash in an endowment policy until 10, 20 or 30 years after the purchase date. Many endowment policies in the United Kingdom are tied to mortgages and the policyholder can only cash in the policy if the funds are to be used to pay off a home loan. In some instances, funds held in endowment policies can only be accessed if the policyholder incurs certain types of medical costs or becomes disabled.
Generally, anyone cashing in an endowment policy has to sign a withdrawal form and state the reason for the withdrawal. While withdrawals are typically only permitted in certain circumstances, some policies include provisions that enable the insured to make premature withdrawals. In most instances, premature withdrawals result in penalty fees that can deplete the lump sum that the policyholder receives. Additionally, endowment policies in some nations are afforded special tax treatment which means the premiums grow tax deferred. Policyholders often have to contend with a significant tax bill as a result of cashing in a policy.
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