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How To Buy Endowment Policy By Understanding The Different Types

If you have plans to buy endowment policy, the first thing you must understand is the different options of endowment policies. It is also important to know what you should choose an endowment policy over a whole life insurance

There are three different types of endowment policies: with-profit, unit-linked and low-cost endowments insurance.

Traditional Endowment with Profits

This is a policy where you get an assured amount at the end of the pre-determined period. However, this amount can increase with bonuses from the profits made on the investments, if any. Some Traditional with profits policies have a clause called Market Value Reduction which means if you pre-terminate the policy, you might get a lower value because it protects other investors from a drop in the investment. You can sell this policy to someone and the new owner will assume the monthly payments. The new owner will have to pay a higher amount than what the previous owner was paying since there is the assumption that the value has increased.

Unit Linked Policy

If you choose this type, you will also need to decide where your investment will go. The choices are based on units. The cost of the insurance will be paid by the units which will need to be encashed. The value of this endowment policy will depend in the current price of the units.

Full Endowment

This is the traditional with profits policy enhanced. In other words, the value of the basic sum you get is equal as the death benefit, which means you are assured of a higher value provided the investment is doing well.

There is another type which is being used as a tax shelter having been modified for this purpose. This adjustment of the full endowment is carefully monitored by the IRA with strict regulations and the 7 pay rule which limits the amount of your investment.