Endowments and whole life policies are two different types of permanent life insurance. Both accumulate cash value, unlike term life insurance, so policyholders feel they are getting some of their premiums "back".
Both types of policies pay a lump sum of money either to beneficiaries upon the insured's death or back to the living policyholder when the policy's term matures. The difference is that endowments have a shorter coverage period and mature sooner, usually in 10 to 20 years. Whole life policies are designed to last for the insured's whole life, so they mature when the insured policyholder reaches the age of 95 or 100. It is less likely for whole life policies to mature.
Endowments typically have high monthly premiums — the shorter the endowment term, the higher the premiums — while whole life policies often have relatively lower monthly or annual premiums. Whole life premiums are higher than term life insurance premiums, of course, because only part of the premium goes towards insurance, while some of it is invested for future returns to be paid upon maturity. Depending on the type of endowment or whole life policy, both can combine savings and investment strategies, and endowment policies are frequently marketed as college savings plans.
What is an Endowment?
With endowment insurance, as with term life insurance, the focus is on the length of the policy's terms, usually 10 to 20 years. If the insured dies before the endowment's maturity, the policy's face value — also known as the "death benefit" — is paid in a lump sum to any beneficiaries. However, if the insured is still alive at the time of an endowment's maturity, the face value returns to the policyholder.
How much an endowment pays out depends on the monthly contributions the policyholder decides to make to the endowment. The payout amount is also affected by the type of endowment policy.
What is Whole Life Insurance?
Whole life insurance is likely the kind of policy most people think of when it comes to "life insurance." A policyholder pays into the plan, usually on a monthly basis, and this money goes into two places: insurance (specifically, the death benefit) and low-risk investments. The low-risk investment component of whole life insurance builds what is known as "cash value." Upon the death of the policyholder, beneficiaries are eligible for a payout from the life insurance that includes both the plan's face value and cash value. For example, the face value of a plan may be $100,000, but $14,000 may have accrued from investments, meaning the total insurance payout would be $114,000.
Though endowment insurance is used for the purpose of life insurance and providing financial security for beneficiaries, it is also commonly used as a zero-risk college savings plan. However, "zero-risk" also means little return. A portion of all premiums goes toward buying insurance, and endowment interest rates are generally low. Ultimately, this means the payout from an endowment used for savings is unimpressive and may not keep up with inflation. For college savings, a 529 plan or education savings account (ESA) will give greater returns in the same amount of time.
Whole life is permanent coverage — that is, it covers the policyholder for what will likely be his or her entire life. It is primarily used to provide beneficiaries with financial support following the insured's death. Some with whole life insurance also take advantage of these plans' cash values (the money earned from the investment component of whole life), which typically enable policyholders to borrow against the cash value of their own policy. This loan must be repaid by the time of death, or the unpaid amount will be deducted from the face value of the policy.
Premiums and Payouts
Endowment insurance has more expensive premium costs than whole life insurance. The premiums are paid until endowment maturity, at which time the face value, or death benefit, is released to beneficiaries or the policyholder. It is worth noting that the face value of endowment insurance is also its cash value.
The premiums for whole life insurance are paid over the course of the policyholder's life. The death benefit is paid to any beneficiaries after the death of the insured, and any cash value accumulated is generally not paid to beneficiaries. The accumulated cash benefit can, however, be borrowed or used to buy additional death benefits during the lifetime of the insured individual.
Pros and Cons
Endowments comprise a limited premium-payment period, which builds value faster. Also, it is possible to 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; it is also not as popular as it was in the past, making it more difficult to find a wide range of endowment policies from which to choose.
The advantage of whole life insurance is that level premiums are more affordable and distributed throughout the life of the insured. The main disadvantage is that interest or growth rates of cash value are lower compared to other investments and cannot be used as an investment.
Different Types of Endowment and Whole Life insurance policies
Types of Endowment Policies
There are three different types of endowment policies: participating policy (a.k.a., with-profit), unit-linked, and low-cost endowments.
Traditional participating policies are endowment policies that bundle insurance and investment. They guarantee a basic assured sum that is paid at the time of the policyholder's death or when the policy matures, but also offer the possibility of additional payments or bonuses depending upon the performance of the investment. These payouts may be reversionary (usually annually) or terminal (end of policy) bonuses; in case of adverse market performance, the surrender value can also be reduced. This type of endowment insurance has been criticized for having a low rate of return and no flexibility for premium payments.
Unit-linked insurance is an endowment policy in which the premiums are invested in a unitized insurance fund. These types of policies are mainly found in the UK.
Low-cost endowment policies aim to pay off mortgage debts. However, the drawback of these policies is that sometimes funds received upon an insurance policy's maturity are not enough to repay the mortgage.
Types of Whole Life Insurance
Several different types of whole life insurance exist: non-participating, participating, indeterminate premium, economic, limited pay, single premium, and interest sensitive.
In non-participating insurance, premiums, death benefits, and the cash surrender value are determined at the time the policy is issued and cannot be changed. Thus, as the case maybe, the insurance company is entitled to any existing excess profit. If claims are underestimated, the insurance company bears the risks and is responsible for paying the difference.
In participating insurance, the excess profits (dividends and bonuses) from the premium are shared with the policyholder and are tax-free during the policyholder's life.
An indeterminate premium policy is like non-participating insurance, except that the premium may vary each year but not exceed the maximum premium agreed upon. In these policies, premiums tend to increase with the insured's age.
Economic insurance policies are a hybrid of participating and term life insurance, in which a part of the dividends is used to purchase extra term insurance. Thus, this type of policy may yield a higher death benefit in some years and lower death benefit in others.
Limited pay insurance lasts for the full length of the insured's life, but premiums are paid within the first 20 or so years of the plan. This policy may thus cost more upfront, to build sufficient cash value for the remaining years of the policy.
A single premium policy, as the name suggests, involves one single large payment upfront. There is usually a fee charged in case the policyholder decides to cash in earlier.
In interest sensitive policies, concepts from both whole life and universal life policies are combined. The interest accrued on the cash value varies with market conditions. The death benefit remains constant, though the premiums may vary up to a maximum preset value decided in the policy.