 Posted: Tue Aug 26, 2008 6:11 am Post subject: |
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| Quote: | | In addition to that, people back then (60s or 70s) did not have much knowledge about ways how to invest their money. Therefore endowment was attractive because of its return. |
Add to this that there were not many options available for investments as well. The two most popular forms of insurance plans available that time were the traditional term life plans and the endowment plans.
Its true that against the term life plans, which doesn't offer any return other than the death benefits, endowment plans were a better options for the people. The returns too looked attractive because it was calculated on the then price index, and hasn't taken the inflation rate into consideration, which has exploded since then.
~jeremy |
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JeremyHolter
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| Posted: Tue Aug 26, 2008 7:01 am Post subject: |
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| Quote: | | Yeah, I guess I first need to qualify my need before getting a new policy. Thanks guys. |
That's just the right approach.
I believe that the customer should always purchase a plan that suits his needs best. However, I've seen many to believe what other say and follow the trend. I guess, that's another reason why the endowments plans have lost their popularity.
Universal plans and equity indexed plans are now in trend. Most of the policy holders feel that they will be better off by purchasing what is current in the market and don't evaluate their needs much.
Universal plans are good for investment purpose, but it may not always be the right option for people who have their families' interest to preserve.
Thanks,
Rupert |
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RupertWBradson
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| Posted: Mon Nov 30, 2009 8:20 pm Post subject: |
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I agree completely with InsInvestigator. The Tax Reform Act of 1986, as amended, has, unintentionally, all but made endowments one of the most unfavorable uses of insurance through the creation of previously nonexitent "modified endowment contracts" (MECs).
But, even if that were not the case, endowments are the costliest form of individual cash value life insurance on the planet. Let me give you the example I use when teaching on the subject of cash value insurance and endowments in particular.
Imagine an inflated balloon. It represents the life insurance policy -- when the insured dies, the balloon bursts and the money inside rains down on the beneficiary. When a cash value policy is first started, it is only filled with air, which represents the insurance company's liability in a death claim. Over time, the air is replaced with cash value, so some of a death claim is still air, while the rest is the owner's cash value. At some point in time, if the insured has not died, the policy will mature or "endow" (used to be age 100, with the CSO 2001 mortality tables it is now age 120/121). The balloon contains no air, and it bursts, showering the money on the policyowner -- usually the face value of the policy, possibly more, sometimes less.
An "endowment" policy, by definition, matures much earlier than age 100, such as age 65 or 70, or in a stated period of time, such as 10, 20, 30 years, regardless of age. How can that be true? One must put pressure on the balloon to accumulate money at a faster rate (more $$ in premium). Because insurance contracts pay such low internal rates of return (3%-5%), there is not much time for compounding to work, and that puts added pressure on the balloon (even more $$ in premium).
When you shorten the time to accumulate (squeeze the balloon between your hands) and then put more pressure on the accumulation due to low return on savings (squeeze the balloon even harder), it forces the balloon to expand vertically (total premium payable), but it does not change the volume inside the balloon.
Now, we're also talking about a type of life insurance, the cost of which is directly influenced by age. Endowments are usually attractive to older persons who have less time available. So the cost of insurance itself will be higher to begin with.
Typically, an endowment can be 5-7 times more expensive than a whole life policy applied for at the same age. If you don't like the thought of paying $500 per year for a $100,000 policy from now to age 120, you definitely won't like one that costs $3000 per year from now to age 65.
Endowments are available from almost any company marketing cash value policies. They just aren't very popular in the face of the tax implications. The only true benefit is the death benefit payable to a beneficiary if the insured dies before the stated endowment age.
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California-licensed Property & Casualty Broker-Agent and Life & Health Agent. CA Insurance License #0596197. Send me your questions, and I'll send you my answers. I live, breathe, and teach insurance! |
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MaxHerr
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