Endowment policies provide a cash payment to the insured and require higher premiums than simple life insurance policies. Withdrawals can be made after a specific point in the future, but penalties may apply for early withdrawals. Tax treatment varies by country.
Endowment policies are life insurance contracts that provide the insured with a vital benefit that takes the form of a cash payment. An insured can collect on an endowment policy by completing and submitting withdrawal documentation to the insurance company that wrote the policy. In some countries, such as the United States, policyholders can also collect an endowment policy by hiring the agent who sold the contract.
Simple life insurance policies provide contract beneficiaries with a cash payment upon the death of the insured. The insurance company finances these payments by requiring policyholders to pay monthly premiums. Endowment policies work in a similar way, except that monthly premiums are often higher and some companies even charge the premium in the form of a single lump sum payment. A portion of the premium goes to provide life insurance benefits, but the rest of the premium goes into a cash account that pays a fixed or variable rate of return. Typically, an insured can cash out an endowment policy at a specific point in the future.
In some cases, endowment policy premiums are invested in simple interest accounts, in which case funds can be quickly accessed when the policyholder makes a withdrawal request. Some insurance companies invest premiums in mutual funds or securities accounts, in which case a broker must sell the securities when the policyholder requests collection on the policy. Securities laws vary, but in many countries, it takes three days or more for the selling party to receive the proceeds from a security sale. Thereafter, the insurance company must disburse the proceeds to the policyholder so the entire withdrawal process can take more than a week to complete.
Staffing policies vary from country to country. In the United States, policyholders typically cannot cash in on an endowment policy until 10, 20, or 30 years after the date of purchase. Many UK endowment policies are linked to mortgages and the policyholder can only cash in on the policy if the funds are to be used to pay off a mortgage loan. In some cases, funds held in endowment policies can only be accessed if the policyholder incurs certain types of medical costs or becomes disabled.
In general, anyone who collects an endowment policy must sign a withdrawal form and state the reason for the withdrawal. While withdrawals are generally only allowed in certain circumstances, some policies include provisions that allow the insured to make early withdrawals. In most cases, early withdrawals result in penalties that can deplete the lump sum the insured receives. Additionally, endowment policies in some nations receive special tax treatment, which means that premiums increase tax-deferred. Policyholders often have to deal with a significant tax bill as a result of collecting on a policy.
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