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ENDOWMENT POLICIES

As mentioned previously, level premium term insurance to age 100 is identical to whole life insurance. There is also another type of life insurance that is identical to whole life insurance�endowment at age 100. However, the majority of endowment contracts mature at ages less than 100. At earlier maturity dates they are not identical to whole life policies.

FIGURE 5-1
One-Year Level Term

Endowment life insurance policies are a variation of whole life insurance. They not only provide level death benefits and cash values that increase with duration so that a policy�s cash value equals its death benefit at maturity but they also allow the purchaser to specify the policy�s maturity date.

A whole life contract provides a survivorship benefit at age 100 that is equal to the death benefit that would have been payable prior to the insured�s age 100 (see figure 5-2). Endowment contracts merely make the same full survivorship benefit payable at younger ages. Among the wide variety of endowments available are 10-, 15-, 20- 25-, 30-, 35-, and 40-year endowments (or longer), or the maturity date can be a specific age of the insured, such as 55, 65, 70, or older.

FIGURE 5-2
Whole Life

The endowment contract was designed to provide a death benefit during an accumulation period that is equal to the target accumulation amount. Purchasing an endowment policy with a face amount equal to the desired accumulation amount assures that the funds will be available regardless of whether the insured survives the target date. The policy was popular with purchasers who were beyond the chronological midpoint of their careers and sought accumulation for retirement or other objectives. As Dr. Solomon S. Huebner often pointed out, young people prefer term life insurance; with more experience and age purchasers prefer whole life because of its level premiums; the mature market prefers endowments with the earlier cash value accumulations that they can use during their own lifetimes.

With the advent of double-digit inflation rates during the late 1970s and early 1980s, most consumers were moving away from long-term fixed-dollar contracts including nearly all forms of life insurance and particularly endowment policies. This happened in an economy where tax-sheltered investment in real estate had taken on a frenzied pitch as consumers turned to much shorter maturity contracts and investments. This was a reasonable reaction to runaway inflationary expectations.

Although endowment contracts were readily available, sales were declining in the United States even before the federal income tax law was changed in 1984 to take away the tax-free buildup of flexible-premium endowment policies� cash value. Congress was concerned that life insurance policies (especially endowment and universal life) with high cash values relative to their death benefit amounts were being used as a tax-advantaged accumulation vehicle by the wealthy. Congress had, by then, developed a dislike for any form of real or perceived tax shelter. The legislators therefore developed a test for flexible-premium life insurance. This so-called corridor test�Sec. 101(f) of the Internal Revenue Code�took away the tax preference that flexible premium endowments previously enjoyed, although it retained the preference for policies in force before 1985. Subsequently adding Sec. 7702 to the Internal Revenue Code extended the corridor test to all life insurance policies, including fixed-premium endowments, entered into after October 22, 1986. (See table 5�1.)

Since 1984, sales of new endowment contracts have been very limited. While contracts are still available from a few insurers, most new sales are for policies used in tax-qualified plans where the tax treatment is controlled by other factors.

Outside of the United States, especially in countries with high savings rates, however, the endowment policy is still quite successful and widely purchased to accumulate funds for a variety of purposes. It is frequently purchased to fund retirement and sometimes to fund children�s higher education.

It is interesting to note that endowment policies purchased in other countries are usually bought for the same reasons permanent life insurance policies are purchased in the United States. Regardless of the society or its tax laws, the primary factor motivating life insurance sales is an individual�s concern about financial security for his or her children, spouse, parents, and/or business partners. The individual�s particular needs tend to change in predictable ways over a normal life cycle.

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