An endowment policy is a contract that pays a lump sum amount in the event of death of the insured or after ‘maturity’ of the contract. Endowment policies are usually unit linked ones and are not very flexible in nature. The maturity period of such policies can range from ten to thirty years.

• Endowment policies are provided as a for-profit product to the consumer and can also be ‘surrendered’ earlier. If these policies are surrendered before their maturity or the death of the insured then the company pays out a certain value called the surrender value. This sum is calculated by taking into consideration factors such as the length of the policy and the amount of premiums paid by the insured.
• In traditional with profits endowments there is a fixed amount of sum that is paid out which is called the sum assured. This sum assured can be increased by adding periodic bonuses and regular bonuses are guaranteed at the end of the contract and a non-guaranteed bonus can be paid out which is also called the terminal bonus.
• The surrender value or encashment value of such policies are calculated by using a method called market value reduction (MVR). If a MVR is applicable to a policy that has been surrendered earlier then the sum would be reduced according to the calculations of the fund managers of that policy. Endowments usually provide very low surrender value and have been criticized in the past for the same and for the inflexibility of premiums if the insured is unable to pay due to genuine reasons.
• Unit linked endowment policies are different from traditional for-profit policies in that they can offer the consumer a chance to choose where the amount should be invested. These are also called unitized investment funds where premiums are invested in units. The value of the units is periodically published and the value of the policy is the current value of the units.
• Many people do surrender their policies before time and accept the surrender value offered by the insurer. This means that they stand to lose a lot of benefits which did not go well with people who were in a bad financial condition and surrendered the policy. A new market for second hand endowment policies emerged as a result of this where the insured could sell their policies for more than the surrender value offered by the insurance company. Such endowments are also called traded endowments.
• Trade endowments work well because they tend to benefit all the parties that are involved including the buyer of such second hand policies. The buyers usually tend to benefit since the policy is more powerful and financially healthy if it remains in force. This is the reason why many companies offer to buy traded insurance or used insurance. The death benefit then goes to the buyer of such insurance along with the responsibility of paying the premiums on time.
• Modified endowments were created in the United States of America because of the undue advantage that many people took by using single premium policies. These modified endowments restrict the amount of tax liberty that is provided to the insured person ensuring mitigation of tax evasion through legal loopholes.

If you have any other points related to this topic please feel free to leave a comment.