Endowments

Endowments are a specialized category of whole life insurance. Decades ago the highly accelerated growth of cash values of these polices resulted in legislation against them. The Tax Reform Act of 1984 mandated that any policy issued after January 2005 that endows (or, matures and pays) its policy-owner before the age of 95 would no longer qualify as life insurance. In other words, the policy's cash value accumulation and death benefit would be taxable. Endowment policies bought before January 1st, 1985 weren't affected by this legislation, but it nevertheless effectively stripped away virtually all of the endowment's financial advantages.

As with other types of insurance policies, the endowment pays a face value benefit upon the death of the insured. And like the limited payment policy, the premiums are paid for only a specified period of time. The policy endows at the end of the premium-paying period (which is also known as the endowment period). Therefore, if the insured is alive at the end of that period, the policy-owner would receive the face amount maturity benefit and the insurance coverage would come to an end.

An endowment policy has all of the same elements as a regular whole life policy. Specifically, it pays the policy's face amount if the insured dies during the endowment period, or it pays the face amount to the insured if he or she survives to the end of the endowment period. When the premium period is ended, the endowment matures on the maturity date and pays out the face amount. The primary difference between an endowment and a whole life policy is that the endowment matures earlier (at a specified age or date); the cash value must therefore build up more rapidly, making the premium higher per $1,000 of coverage. Endowments can be for various periods of time; ten- or twenty years, or to age 65, for example.

When the endowment policy matures, there is no longer any insurance protection. The policy matures and pays the face value as a living benefit. The overall concept of an endowment is very similar to that of whole life; in fact, it could even be said that whole life is an endowment at age 100. By endowing after age 95, however, whole life maintains the tax advantages of life insurance that endowments lost with the tax legislation of the mid-1980s.

One of the most commonly sold endowment contracts was the retirement endowment. This type of policy was generally written to mature at age 65 when the insured planned to retire. Like whole life insurance, the face value was payable as a death benefit if the insured died before the maturity date (in other words, during the endowment period). However, at maturity, the full face value of the policy became payable as a living benefit, typically in the form of monthly installment income.

Endowments are generally not sold today due to the tax changes enacted in the 1980s that eliminated many of the benefits that once made them so attractive as investment vehicles.