What is 20 year endowment life insurance?

Answer 1

An endowment life insurance is an insurance product that has similarities to a Certificate of Deposit. The big difference is that it pays a death benefit unlike a Certificate of Deposit.

Upon purchase, the buyer selects the amount and duration of coverage. The shorter the term, the greater the payment; the longer the term the lower the payment.

If you live to the end of the term, the policy matures and pays the face amount of the policy to you. If you die during the term, it pays the face amount to your beneficiary. So, if you bought a 20 year endowment policy, premiums are paid for 20 years. If you live to the end of the term, it pays the face amount to you.

If you die during the 20 year term, the policy pays the face amount to your beneficiary.

This type of policy focus more on growing the cash value rapidly than providing a death benefit. In the United States, laws were passed that ended the marketing of endowment policies. In 1984, the US passed the 1984 Tax Reform Act which states that cash value can not be bigger than the face amount when you are 95 years old. If your life insurance policy violates this rule, you lose all tax advantages. There will be no tax-deferred growth and death benefit will be taxable. In 1988, the US passed the Technical and Miscellaneous Revenue Act, which states that if the cash value is bigger than what it is supposed to be in 7 years, then your policy becomes a Modified Endowment Contract (MEC). If your life insurance policy becomes a MEC, then any loans or withdrawals on the gains in your policy will be subjected to income tax. Also, it will be subject to 10% penalty if you are under age 59 1/2. Keep in mind, these tax laws don't banned the marketing of Endowment policies in US, but companies selling it have to give disclosures about the tax treatment.