Endowment policies provide life insurance and a cash payment, with premiums going into a cash account that pays a fixed or variable rate of return. Policyholders can cash out by completing withdrawal documents, but penalties may apply for premature withdrawals. Tax implications should also be considered.
Endowment policies are life insurance contracts that provide the policyholder with a vital benefit that takes the form of a cash payment. A policyholder can cash out an endowment policy by completing and submitting withdrawal documents to the insurance company that wrote the policy. In some countries, such as the United States, policyholders can also cash in on an endowment policy by contracting the agent who sold the contract.
Simple life insurance policies provide policyholders with a cash payment upon the death of the policyholder. The insurance company funds these payments by requiring policyholders to pay monthly premiums. Endowment policies work similarly, except the monthly premiums are usually higher, and some companies even charge the premium in the form of a single, lump sum payment. A portion of the premium goes to providing life insurance benefits, but the rest of the premium goes into a cash account that pays a fixed or variable rate of return. Typically, a policyholder can cash an endowment policy at a specific time in the future.
In some cases, premiums from endowment policies are invested in simple interest accounts, in which case funds can be accessed quickly when the policyholder makes a withdrawal request. Some insurance companies invest the premiums in mutual funds or stock accounts, in which case a broker must sell the stock when the policyholder applies to cash on the policy. Securities laws vary, but in many countries it takes three days or more for the selling party to receive the proceeds of a securities sale. Next, the insurance company has to pay the proceeds to the policyholder so the entire withdrawal process can take more than a week to complete.
Endowment policies vary from country to country. In the United States, policyholders typically cannot cash an endowment policy until 10, 20, or 30 years after the date of purchase. Many endowment policies in the UK are linked to mortgages and the policyholder can only cash out on the policy if the funds are to be used to pay off a home loan. In some cases, funds held in endowment policies can only be accessed if the policyholder incurs certain types of medical bills or becomes disabled.
In general, anyone cashing out an endowment policy must sign a withdrawal form and state the reason for the withdrawal. While withdrawals are generally only permitted under certain circumstances, some policies include provisions that allow the policyholder to make premature withdrawals. In most cases, premature withdrawals incur penalties that can deplete the lump sum the policyholder receives. Additionally, endowment policies in some countries enjoy special tax treatment, meaning premiums grow tax-deferred. Policyholders often face a significant tax expense as a result of cashing out on a policy.
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