Endowment policy

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An endowment policy is a life assurance contract designed to pay a lump sum after a specified term.

Policies are typically with-profits or unit-linked.

1 Full endowments
2 Unit-linked endowment
3 Modified endowments (U.S.)
4 Additional protection
5 See also

[edit] Full endowments

A full endowment is a with-profits endowment where the basic sum assured is equal to the death benefit at start of policy.

÷== Low cost endowment (LCE) == A low cost endowment is a with-profits endowment policy with reduced basic sum assured (typically 1/3 of the target amount) with an element of life assurance. The idea is that the life assurance element and basic sum assured repay the target amount on death.

These plans were originally designed to act as a mortgage repayment vehicle.

[edit] Unit-linked endowment

The premium is invested in units of a unitised insurance fund. Units are encashed to cover the cost of the life assurance. The market in second hand endowment policies (SHEPS) or traded endowment policies (TEPS) deals exclusively with a type of endowment policy known as “With Profits”. To know whether your endowment policy is “With Profits” look at the last bonus statement. If it mentions units, it is probably a Unitised or Unit Linked policy, if bonuses are in sterling and there is no mention of units then it is probably a traditional With Profits. The other types of policies - “Unit Linked” and “Unitised With Profits” have a performance factor which is dependent directly on current investment market conditions. These are not tradable as there is no real buyers market for them.

[edit] Modified endowments (U.S.)

Modified endowments were created in the Technical Corrections Act of 1988 (H.R 4333, S. 2238) in response to single-premium life (endowments) being used as tax shelters. They are contracts with fewer than 7-level annual premiums, and are subject to more stringent tax regulations (tax code 7702, 7702A). They are also subject to IRA-like annuity rules (such as penalties for pre-death proceeds before age 59½). If a life insurance policy is changed and then fits the seven-pay rules, it may then be redifined as a modified endowment.