Endowments

the decline of endowments

The popularity of endowment contracts ended suddenly, in 1984, with passage of federal legislation that effectively stripped endowment contracts of their favorable life insurance tax status. It did this by defining "life insurance" as a product that endows no earlier than age 100 (since increased to age 120). All endowments bought after 1986 have lost the benefit of tax deferred cash value growth. A few insurers still make these policies available, and they are sometimes sold in tax-qualified plans. However, the popularity of these policies has greatly decreased. Endowment contracts issued before 1986 were grandfathered and many continue in force today. But new endowment contracts hold little interest for American buyers. They continue to be popular outside of the United States. The reasons for this popularity are largely the same reasons these contracts were popular here: to fund education and retirement.

endowments are not modified endowment contracts

Traditional endowment contracts should not be confused with the modified endowment contract (MEC). Created with the same tax legislation that stripped endowments of their favorable tax treatment, MECs are a label assigned to any permanent life insurance policy that is paid-up in seven years or less. (The target of the legislation was the single premium life insurance policy.) MECs lose some, though not all, of the favorable tax treatment enjoyed by life insurance. MECs are addressed more thoroughly in a different lesson.

Endowment contracts issued today no longer qualify as life insurance (for tax purposes), but those issued before what date were grandfathered and still retain favorable life insurance taxation?

1986 Endowment contracts issued before 1986 were grandfathered and many continue in force today.

Endowment contract vs. life policy

A life insurance policy is said to mature, or endow, when its guaranteed cash value equals its face amount. This point is known as the endowment date. If the insured is still alive at maturity, the cash value is paid to the policyowner and the coverage terminates. Whole life insurance is correctly defined as endowment at age 120 policy. As a distinct product, an endowment contract is a special form of life insurance in which cash values grow rapidly. As a result, the policy endows well before age 120. This type of policy pays in two ways: As with any other life policy, if the insured dies before the end of the endowment period, the policy pays a death benefit to the beneficiary. If the policy endows while the insured is still alive, the policyowner receives a specified sum as a living benefit. This is the feature that is unique to endowments.

uses of endowments

Endowment contracts were once very popular. They were a guaranteed way to build a predetermined amount of money to use at a future date. Policyowners used endowments to meet many financial goals. For example, they were often bought to fund children's education or to provide retirement income. For these reasons, 10- or 20-year endowment policies, or endowments at age 21 or 65, were very common.

Why are endowment contracts NOT considered life insurance?

they endow before age 120 To meet the legal definition of life insurance, a policy cannot endow before age 120. However, endowment contracts build cash values quickly and endow well before age 120.