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What Is an Endowment Plan?

Osmand Vitez
Osmand Vitez

An endowment plan is a form of life insurance available to individuals, typically sold by a financial services firm. Also called endowment insurance, it allows the policyholder or other beneficiary to begin receiving the insurance payments if the policyholder is still living at the plan’s maturity date. The policy also pays out to a beneficiary if the policyholder dies prior to the plan’s maturity date. In some cases, an individual may leave money or other items to a charitable institution, making this an endowment plan that pays out to an endowment fund. The endowment fund typically is given a specific use by the institution receiving the money.

Life insurance policies always have similar parts that make them useful. In most cases, an individual agrees to pay an insurance company fixed payments for a defined number of years. The payments are representative of the individual’s age, health, and other current factors. If the policyholder has not died by the end of the term period, then the individual can renew the policy, although the payments may change as the individual ages. An endowment plan is no different than these other policies as these features are typically the same for all of these types of insurance plans.

Woman holding a book
Woman holding a book

Many different types of life insurance policies are available, all having specific attributes that may be beneficial or not, depending on the policyholder’s needs. These insurance plan types may be low cost, have profit options, or be flexible in payments. A low-cost endowment plan may have low maintenance fees and require lower-than-normal payments. A profit-style endowment plan may allow the individual to place money into stocks, bonds, or interest-bearing accounts so the money grows over time. Low payment options allow policyholders to afford this insurance plan type so they can manage the payments over longer time periods.

An endowment fund is a type of capital account charitable organizations use to receive funds from outside sources. An organization may have specific endowment funds for different uses. Colleges and universities often have defined endowment funds that allow them to operate within certain boundaries. The connection between an endowment fund and an endowment plan is that the latter can pay out into the former. When a policyholder dies, the payments go straight into the charitable organization’s account, a convenient arrangement that makes continuous operation easy and avoids obstacles from other forms of charitable giving.

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