People do not always purchase life insurance solely to pay final expenses and secure the financial future of family members. Life insurance can also be an investment and a way to make sure you do not outlive your money. Endowment life insurance is a form of permanent insurance you can purchase for this reason.
Identification
Endowment life insurance is a form of whole life insurance with features similar to a limited payment whole life policy. Like limited payment life insurance, you make premium payments for a shorter period than you would for a normal whole life policy. If you die during the premium payment period, your beneficiaries receive the face value of the insurance as normal. Differences appear if you are still alive at the end of the premium payment period. At that time, the policy endows, or pays out the maturity face value of the insurance, and the policy is no longer in force.
Modifications
Before the Tax Reform Act of 1984, many wrote these policies as retirement endowments set to mature at age 65. Because of tax advantages and because the cash value of endowment life insurance grew at such an accelerated rate, the government implemented two major changes to endowment life insurance.
Modifications put into effect with the Tax Reform Act of 1984 said that the cash value of the policy could not become greater than its face value before the purchaser reached the age of 95. If it did, the policy would lose all tax advantages. A 1988 modification worked to more narrowly define endowment life insurance and separate it from other investment tools. If the cash value of any life insurance policy, including endowment life insurance, grows by more than is normal for a seven-year period, the IRS no longer considers it life insurance. It then becomes a Modified Endowment Contract and is subject to taxation as "other income."
Benefits
Despite modifications, endowment life insurance provides benefits for both personal and business use. You can incorporate a tax-free endowment life insurance payout in estate planning to help pay inheritance taxes or use it to create a charitable endowment for a school, church or organization. Because an endowment life insurance policy accumulates cash value, you can use it as collateral for personal or business use. Finally, you can designate policy proceeds as operational capital to make sure your business continues running after you die.
Tax Implications
Whether set up in installments or as a lump sum, proceeds from an endowment life insurance policy are taxable in the same way as other permanent insurance when you take a payout. To determine the amount on which you will pay tax, determine the total amount you paid in monthly premiums and subtract the amount of the payout. The difference is taxable. An exception is if the payout occurs as a death benefit. The payout is then tax-free.
Considerations
According to the InsBuyer Insurance Buyers Guide, endowment life insurance lost much of its appeal when interest rates for other investment options began increasing in the late 1970s and early 1980s. It continues as a less-popular insurance option in spite of increasingly competitive interest rates. In addition, endowment life insurance is more expensive compared to other forms of permanent insurance. Monthly premiums can be $1,000 or more, according to Financial Web.The main reason for this is the accelerated rate at which cash value accrues. On the positive side, cash value of this type of life insurance is also higher.
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