What Life Insurance Pays If You Do Not Die?
People purchase life insurance to provide financial protection to loved ones.
If the insured dies while the policy is in force, named beneficiaries receive a payment.
This may be enough money to pay off a mortgage, pay for minor children to attend university, or allow survivors to live comfortably for a lifetime.
A unique type of life insurance pays out even when the insured does not die, providing a return on an investment that can be used for any purpose.
Endowment policies are life plans that combine life insurance and saving money for the future. If the insured does not die during the policy term, he or she receives a small lump sum payout. Though this type of policy can be much more expensive than a plan that includes only life insurance, some high rate taxpayers use it as a tax wrapper. The life insurance component of this policy can be quite small, making it necessary for some people to purchase additional life cover.
The minimum term for an endowment policy is usually ten years and the maximum may be 15 or even 20 years up to a particular age. It usually designed as a life insurance policy but some plans pay out for critical illness. If the policyholder dies before the end of the term, a predetermined sum will be paid.
If the individual lives past the policy maturity (end) date, he or she receives an agreed-upon sum. Bonuses may be added to the policy, typically annually. Once these are added, they are guaranteed to be paid.
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Consumers traditionally used endowment policies to repay interest-only mortgages. They were also used to save for a specific future event. Though endowment policies have become less popular, several providers including Prudential still offer them. Endowment policies can be surrendered and some are suitable for trading.
Traditional With-Profits, Unit-Linked, and Low Cost Endowment Policies
Endowment policies are typically categorized as traditional with-profits or unit-linked. A traditional with-profits endowment features a guaranteed payout called the assured sum, which can be increased by adding bonuses based on investment performance.
A revisionary bonus is a regular bonus guaranteed at maturity. A terminal bonus is a non-guaranteed bonus that may be paid at policy maturity. A Market Value Reduction (MVR) may take place during unfavourable investment conditions. An MVR reduces the surrender or encashment value of the policy.
With a unit-linked endowment, the policy premium is invested into unitized insurance fund units. The policyholder may be able to select the funds and proportion of premium invested into each one. By encashing the units, the provider covers the life insurance cost. Unit prices are published regularly and the current value of units represents the policy encashment value.
A low cost endowment policy features an endowment with an estimated future growth rate that meets a targeted amount and decreasing life insurance that ensures payment of at least this amount if the insured dies during the policy term. A low cost endowment policy does not guarantee mortgage repayment.
However, a reputable provider checks the policy performance ten years prior to maturity, five years prior, and then each year to verify that the plan will provide the amount of money required. If a shortfall seems likely, the provider will offer recommendations.