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Endowment life insurance

Nowadays people purchase life insurance policy not only to protect the loved ones after the death but also to take advantage of insurance as an investment alternative. Endowment life insurance is a saving scheme that has a life insurance attached to it. The main difference between endowment life insurance and other types of insurance is that with the endowment life insurance a person or his beneficiaries get the money even if the insured person does not die during the period of the policy. This option is called a living benefit. The saving element of this policy allows the value of money to grow over time and the amount saved can be used by the individual after the termination of the policy. If the insured person dies sooner than the end of the policy, the dependents get an amount of money stipulated in the contract.

Advantages of endowment life insurance

This policy became very popular recently because it has numerous advantages. First of all, money will always be received. In contrast, most other life insurance policies have no cash-in value and if the person is not dead at the termination date of the insurance contract he is not compensated for the premiums that have been paid for a long period.

The second advantage is that the individual is given a lot of freedom where he can use the income from the endowment insurance policy. The money can be used as a retirement fund. This way a company pays a regular amount of money and the person can use this money for his personal needs. Moreover, a loan can be taken out against endowment life insurance account. Since this account has high cash-in value an individual can be sure that bank or other credit institution will not reject his application. What is more, a better loan interest rates can be offered by the bank because of a reliable collateral offered by the borrower.

What happens in case of death

If the individual dies during the term of the policy, the money will be delivered to his dependents. On the other hand, if a person has no relatives or is a generous person, he can leave money from endowment life insurance to a charity. What is more, money received in case of death can be used as an operational capital of a business. This way the company is able to survive even if the main stockholder died. Money also can be used to replace the income for surviving family members to pay the bills and dues that are left after the death of the insured person. Last but not least, money form endowment life insurance can be used for estate planning purpose. It is likely that after death estate taxes can be become a burden to the members of the family. However, endowment life insurance benefit helps to pay the taxes and save the estate.

Types of endowment life insurance

Two most commonly used types of endowment life insurance include traditional with profits endowments and unit-linked endowments. The first type includes a guaranteed amount to be paid out that is called a sum assured. This sum can be altered through declared profits if the investing is successful. Two types of bonuses can be added to life insurance cover. Reversionary bonuses are added annually as cash values computed as percentage of the basic sum assured and bonuses declared during previous years. Terminal bonus is granted at the end of the policy and is used to motivate policyholders to keep their money till the maturity.

However, if the investment climate is not suitable and the conditions are averse, a process called market value reduction can be applied. To put it simply, a large gap between the market value of the investment and the face value of premiums is reduced or eliminated. This is used to protect the investors that remain in the fund.

There are two types of with profit endowments: low cost ad full cost. Full cost endowment is the most expensive and guarantees to pay the full sum assured upon death of the insured person. If the investment is successful the sum assured will be much higher that the initial sum stipulated in the contract. The more common type is low cost endowment policy. This way the insurance policy guarantees only a fraction of the target death benefit and an estimated future growth rate of the premiums is set in order to meet the target amount at a fixed date in the future. Low cost endowment policies are usually purchased to cover endowment mortgage. With significantly lower premium a person can be sure that his interest only mortgage will be paid off fully.

If a person chooses unit-linked endowments, his premiums are invested in units of a fund. The cost of life insurance is deducted from the premiums ant the remaining amount of money is used for investment purposes. A person is usually allowed to choose where he wants his money to be invested in. Unit values are published often on a regular basis and the cash-value of the policy is equal to the market value of the units.