Endowment and whole life insurance are two different types of permanent life insurance. In endowment insurance, the premium-paying period is shorter than whole life insurance and the insurance amount is paid out within a certain period (ten, fifteen or twenty years) or at a certain age (of the insured person) after which the policy matures. At the time of maturity, a lump sum is paid back.
Whole life insurance remains active throughout the life of the policy holders and premiums have to be paid every year. The insurance company guarantees a death benefit to the beneficiaries after the demise of the insured. Additional cash benefits can be availed by the policy holder during the life of the policy.
edit Premiums and Cash Back
Endowment insurance is considered more expensive than whole life insurance, the cost of premiums being higher than the latter. The premiums are paid till the "endowment age" at which the cash value of the policy equals the face value or death benefit. The premiums for whole life insurance are paid and distributed over a larger period of time. The death benefit is paid to the beneficiary after the death of the insured, and any cash value accumulated is generally not paid to the beneficiary. The accumulated cash benefit can, however, be borrowed or used to buy additional death benefit during the lifetime of the insured individual.
edit Different Types of Endowment and Whole Life insurance policies
edit Types of Endowment policies
There are three different types of endowment policies: with-profit, unit-linked and low-cost endowments insurance.
Traditional with-profit endowments contain a guaranteed sum called "sum assured" that is paid at the time of death of the insured or when the policy matures. Additional payments or bonuses is dependant on the investment performance and can be paid as reversionary (annually) or terminal bonuses; in case of adverse market performance, the surrender value can also be reduced. This type of endowment insurance has been criticized for low rate of return and no flexibility for premium payments.
Unit-lined insurance are ones in which the premiums are invested in units and the encashment value of the policy depends on the price of the units.
Low cost endowment policies aim at repaying debts caused due to mortgage. However, the drawback of this policy is that if the insurance funds are not enough to repay the mortgage, the insurance company does not accept any responsibility to pay any more than the policy amount.
edit Types of Whole Life Insurance
Whole life insurance policies are of different types: non-participating, participating, indeterminate premium, economic, limited pay, single premium and interest sensitive.
In non-participating insurance, premiums, death benefits, cash surrender value are determined at the time of issue of the policy and cannot be changed. Thus, as the case maybe, the insurance company is entitled to any excess profit, if any, and in case the claims are underestimated, bears the risks and is responsible for paying the difference.
In participating insurance, the excess profit from the premium is shared with the policy holder and is tax-free.
An Indeterminate premium policy is like non-participating insurance except that the premium may vary each year but does not exceed the maximum premium agreed upon.
Economic insurance policy is a hybrid of participating and term life insurance in which a part of the dividends is used to purchase additional term insurance. Thus, it may yield a higher death benefit in some years and lowered death benefit in others.
Limited pay insurance continues for the life of the insurance but the premiums are paid within the first 20 or so years. This policy may thus cost more upfront, to build sufficient cash value for the remaining years of the policy.
Single premium policy as the name suggests involves one single large payment upfront. There is usually a fees charged in case the policy holder decides to cash in earlier.
Interest sensitive policies, the interest accrued on the cash value varies with the market conditions. The death benefit remains constant though the premiums may vary up to a maximum preset value decided in the policy.
edit Pros and Cons
Endowments comprise of a limited premium-payment period, which builds cash value faster. Also, it is possible get a lump sum of cash in case of illness or at the time of maturity. The main disadvantage is that endowment insurance is more expensive and not so popular now.
The advantage of whole life insurance is that level premiums distributed throughout life of insured and more affordable. The main disadvantage is that interest or growth rates of cash value are lower compared to other investments and can not be used as an investment.