What is an Endowment Policy?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 03 May 2020
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An endowment policy is a type of life insurance plan that is structured to pay a lump sum once the policy reaches maturity, or if the insured party dies at some point before the policy reaches full maturity. The terms of payment may vary somewhat, in that the term to maturity may be anywhere between ten to twenty years, or be set at a specific age limit. The coverage may also restrict payout based on the cause of death, limiting the terms to issues such as accidents or critical illnesses that were not diagnosed at the time the insurance contract was first initiated.

There are different formats that may be utilized for an endowment policy. One of the more popular approaches is known as the unit-linked structure. With this approach, there are provisions for cashing in the policy before the maturity date is reached. The provisions outline the process for determining the value of the policy at the time the cash out is requested. Typically, the formula involves considering the amount of time the coverage has been in force, as well as the amount of cash that has been paid into the policy up to the date of the cash out request.

The essential purpose of any type of endowment policy is to provide financial benefits to a beneficiary once the contract reaches maturity. Most will include a figure that is known as the sum assured. This is the minimum amount that the beneficiary will receive once the maturity terms have been fulfilled. Depending on the performance of the investments associated with the policy, the beneficiary may receive additional benefits, assuming that the investments performed above par and that a portion of those profits were applied as bonuses to the value of the policy. With most formats for an endowment policy, the bonuses are only factored in if the contract remains in effect until the maturity date is reached.

As with other types of insurance plans, an endowment policy includes provisions for early payout in the event that the covered party should die before the contract reaches full maturity. It is not unusual for certain causes of death to be disallowed, preventing a payout on the policy. For example, the coverage may be considered null and void if the insured party commits suicide, or the death is due to a medical condition that was diagnosed and documented prior to the establishment of the policy. Should it be proven that the beneficiary was responsible for the death of the insured party, he or she will not receive any proceeds from the policy.

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