An endowment policy is a type of life insurance designed to pay outa lumpsum after a specified timespan, or on death. Endowments can be planned to pay out after ten, fifteen or twenty years. Many people see them as savings vehicles that will pay out to beneficiaries if they die during the term. So in essence, it does duty as a savings plan, a life insurance, and an investment.
As such, it can prove very useful in many different ways. So let’s take a closer look.
How do endowment policies work?
Your premiums are divided into a life insurance policy and an investment in the stock market. If the shares perform well, you’ll be paid annual bonuses. A lumpsum will be paid out either on your demise or when the policy matures – an amount dependant on how well the investment has performed. If you should die, then your chosen beneficiaries will receive the lumpsum.
Benefits of an endowment policy
- Chief benefit is that the policy acts as a method of enforced savings. As the holder of the policy, you will be saving regularly over a specified timespan.
- Such disciplined savings will eventually enable you to receive a lumpsum that you can use to pay off a bond or children’s education, or achieve a specific goal you have planned, or reinvest. And in the event of your death, your beneficiaries will receive financial support from the policy pay out.
- An endowment policy gives you the opportunity to see your savings potentially grow faster than the rate of inflation.
An endowment can also help to supplement a pension if that is your specific goal. A lumpsum on retirement can prove very useful. - Endowment plans offer tax exemption on both premium payments and on maturity/death benefits.
- Some endowment plans may also provide the option to take out a loan in the event of an emergency.
- Rider benefits. You may also opt for additional benefits to safeguard against unfortunate events such as accidental death, disability, etc.
- Disadvantages may include the fact that, if the investment has performed poorly, you can’t be assured of the final value of the lumpsum. A factor which means that if you are saving for a specific goal, there could be a disappointing shortfall.
- For an endowment policy to be really useful, you’ll need to remain locked in for a fair length of time. However, if you do choose to move your money, make sure you speak to a professional financial advisor to ensure the most beneficial choices.
Bonuses on endowment policies
How or when you’re paid bonuses depends on the type of policy you have. The bonuses fall into the following categories:
Annual: As long as the fund is performing well, you could be paid monthly bonuses throughout the year. These can be added to your investment amount in annual lumpsums, adding useful leaps to the eventual maturity value.
Terminal: These bonuses are accrued and added to your balance only at the end of the term of the policy, as long as the fund has made a profit. If you’re looking at good returns, these can make up as much as half of the maturity amount – which is why it is important to ensure that the investment aspect of your endowment is handled by the most qualified people.
Choose your endowment policy with care
You may choose to pay monthly premiums as per your saving capabilities – or annually – or on the other hand present a single investment amount which remains with your life insurance during the timespan selected. Select an endowment plan which offers you the opportunity to choose the number of years you would like to pay the premiums and the frequency of such payments.
At maturity of your policy, there are more decisions
Most people use an endowment policy to gain a lumpsum of useful money. They either plan to pay off debt or add to and broaden other investments, or enjoy a long-planned overseas trip. The main purpose is to save cost-effectively for the future, particularly for that unforeseen rainy day when the money might be a timely and necessary supplement to your finances.
Check your policies, check your life
VeriFi is an online tool that provides you with an immediate and up-to-date overview of all your life insurance and investment policies by sourcing information from all the major life insurance companies – and presenting the information in a comprehensive report.
With VeriFi you are able, for no charge, to access information on all your life and investment policies at a glance. You are able to check the types of policies you have, the names of the insurance companies providing the cover, the nature and extent of the insurance cover provided – and other vitally important information such as the details on your policies being correct.
To find out more, please visit: www.verifi.co.za