The Truth About Endowment Life Insurance Policies


Mixed life insurance is a specialized insurance product that is often disguised as an education savings plan. The mixed life insurance policy promises a guaranteed risk-free return on a guaranteed date as long as you make the monthly payments fixed. In addition, the cash value is not taken into account in your child’s eligibility for financial assistance. Could this be the education savings plan you’ve been looking for?

Let’s see if the stated benefits of these policies live up to their promises.

Key points to remember

  • Capitalization life insurance contracts, by pairing term life insurance with a savings program, offer a lump sum payment at maturity.
  • They are sometimes presented as education savings plans – consumers should read the fine print before deciding if this is how they want to save for their children’s education.
  • Other college savings options, such as prepaid tuition and 529 plans, may offer benefits not available with endowment life insurance.

Basically, these policies combine term life insurance with a savings program. As the policyholder, you choose how much you want to save each month and when the contract expires. On the basis of your monthly contributions, you are assured of a certain payment, called endowment at the end of the contract. You can then use this endowment for your child’s tuition, fees, books, living expenses and other expenses. If you die before the policy expires, your child will receive the death benefit payment and still have the money for college.

Are two products for the price of one the best option?

Marketing materials may suggest that endowment life insurance saves you money by bundling products. but is this the case?

Term life insurance, the type included in an endowment life insurance policy, is inexpensive for young and healthy clients. If you broke your monthly endowment life insurance policy payment and used part of it for education savings and part of term insurance, you would get more education savings and more insurance for your life. the same money. Mixed life insurance is certainly not the only life insurance product that combines savings and insurance. However, if your main goal is to accumulate savings, these types of policies are usually not the best option because not all of your money is spent on your savings goal. A part is used to buy insurance.

Risk free may not help long-term savings goals

Endowment life insurance policies do not involve investment risk or interest rate risk. The flip side is that low risk investments generally offer low returns. In other words, you won’t be saving enough to pay for your college education. Your savings may not even keep up with inflation, especially since income from capitalization life insurance policies is taxable.

Two better options exist and they both allow you to minimize your risk. The first is a prepaid tuition plan. This allows you to pay in advance and lock in current tuition fees for future education expenses. These plans are expected to reduce tuition fees by allowing parents to pay early for college years and avoid price hikes.

Savings plan 529

The second option is a 529 Education Savings Plan, which lets you choose how to invest your savings. Ideally, you would invest some of your savings in stocks and some in bonds, gradually moving away from stocks as your child approaches college age. This strategy is similar to how you save for retirement: you take more risk early on when you have a long-term horizon, and as the day you need the money approaches you move on to investing. low risk to make sure the money you need will be there when it’s time to spend it. If you are truly risk averse and willing to accept lower returns, you can also avoid investment risk with FDIC insured money market accounts, savings accounts, and CDs. Whichever investment you choose, an education savings plan will help you maximize your returns while minimizing your tax liability.

With the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, there is now more reason to favorably consider 529 plans. The SECURE Act increased what 529 plans can be used for by expanding the definition of “qualified higher education expenditure”. You can now use a 529 plan to pay for certain expenses associated with registered learning programs. This includes fees, books, supplies, and equipment as long as the apprenticeship program your child is enrolled in is certified by the Department of Labor. The SECURE Act also allows you to use up to $ 10,000 of your 529 savings to pay the principal and / or interest on your child’s eligible student loan debt.

It does not count for financial aid eligibility

529 plans and education savings accounts effectively lose 5.6% of their value when students attend university. The FAFSA takes this money into account and increases the student’s expected contribution to college up to 5.6%. It is important to understand how your savings and investment decisions will affect your child’s eligibility for financial assistance, so that you do not anticipate assistance that you will not qualify for.

Endowment life insurance does not count towards a student’s financial aid eligibility like other college savings vehicles. But this “advantage” is still not a good reason to choose variable life insurance. Even after the 5.6% hit they take, 529 plans and ESAs, when used wisely, will give you more for your college investment than endowment life insurance.

You don’t need a medical exam

Unlike many life insurance policies, you do not need to undergo a medical exam to qualify for an open-ended life insurance policy. For example, to get the Gerber Life College Fund policy, a medical exam is not required unless you are 51 years of age or older and requesting coverage of $ 101,000 or more. This benefit means that an endowment life insurance policy may be a good option if you have a medical history that would prevent you from being eligible for an insurance policy conditional on exams. This is also good news if you prefer to avoid the time and inconvenience of the exam and its associated questions about your medical history. However, you can also purchase a regular term policy without exam. This feature is not unique to endowment life insurance policies. Keep in mind, however, that with any life insurance without a review, the face value of the policy will be relatively small – enough to help a bit, but probably not enough to meet all of the needs you’re trying to meet.

Take a second look before you buy

Unlike a 529 or Coverdell ESA plan, endowment life insurance is not an education savings plan, it is just marketed that way. It’s just life insurance, and the payment can be used for anything without penalty.

No financial product can completely protect you from yourself if you are extravagant. For example, you can take out a loan on your mixed life insurance policy, and if you do, your benefit will be reduced by the outstanding loan amount and the interest you owe on that loan. You will also not receive the full benefit if you do not pay your premiums in full, and if you stop paying your premiums, the policy will expire. Because of these options, group life insurance offers no protection against poor spending choices that you or your child may make.

The bottom line

Endowment life insurance policies seem like a great way to save money for college, but they’re pale compared to your other options. They don’t offer enough insurance or education savings to meet most people’s needs, and they don’t give you the most bang for your buck.

Why choose mixed life insurance? Are they just to save for college?

They are not education savings plans, although they are marketed as such. It is simply life insurance. Payment of the accumulated cash value can be used for anything without penalty.

One of the benefits is that unlike many life insurance policies, you don’t need to go through a medical exam to qualify for an open-ended life insurance policy.

Are there options explicitly aimed at saving for college?

Prepaid Tuition and 529 Savings Plans are designed specifically to help cover future college expenses. Prepaid tuition plans allow you to pay in advance and lock in current tuition fees for future education expenses. A 529 allows you to invest in stocks and some in bonds, gradually moving away from stocks as your child approaches college age. This strategy is similar to how you save for retirement

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