When Does a Whole Life Insurance Policy Endow?

Whole life insurance is a type of permanent life insurance that provides coverage for the insured’s entire life, as long as premiums are paid. Unlike term life insurance, which covers a specific period, whole life policies include a savings component known as cash value. This cash value grows over time on a tax-deferred basis, creating a unique feature where the policy can “endow.”

Understanding Endowment

Endowment for a whole life policy is a specific point in the policy’s lifecycle. It occurs when the policy’s accumulated cash value becomes equal to the policy’s face amount, also known as the death benefit. This means the policyholder is entitled to receive the death benefit amount while still living.

The design anticipates that at a very advanced age, typically age 100 or 121, the cash value will reach parity with the death benefit. At this juncture, the insurance company’s obligation to provide a death benefit upon death is fulfilled through a living payout to the policyholder.

Factors Affecting Endowment Timing

The timing of a whole life policy’s endowment is determined by its contractual terms. Insurers design these policies using actuarial assumptions about mortality and interest rates. These assumptions dictate the specific age at which the cash value is projected to equal the death benefit.

For most traditional whole life policies, this contractual endowment age is set at an advanced age, historically age 100, though many newer policies are structured to endow at age 121. This adjustment reflects increasing life expectancies and modern actuarial calculations. Policy features, such as paid-up additions, can accelerate the growth of the cash value. Paid-up additions are supplemental insurance purchased with policy dividends, which also contribute to cash value growth. While these additions can increase the cash value and death benefit, the underlying contractual endowment age remains fixed.

What Happens When a Policy Endows

When a whole life policy endows, the insurer pays out the face amount of the policy to the policyholder. At this point, the policy terminates, as its initial purpose of providing a death benefit has been met by this living payment.

The tax implications of this payout are important to understand. The amount received above the total premiums paid into the policy is generally considered taxable income. This gain is typically taxed as ordinary income, not as a capital gain, because surrendering a policy to the insurer is not considered a sale or exchange. Policyholders should consult with a tax professional to understand their specific tax liability, as the Internal Revenue Service considers the excess of the cash value received over the premiums paid as taxable income.

Endowment Versus Other Policy Statuses

A policy becomes “paid-up” when all required premiums have been paid, but the policy remains active, and the death benefit is still in force. The cash value in a paid-up policy continues to grow, but it has not yet reached the death benefit amount to trigger an endowment.

Policy surrender, on the other hand, involves the policyholder voluntarily terminating the policy before it endows or matures. In exchange for this termination, the policyholder receives its current cash surrender value. This is a choice made by the policyholder, distinct from the policy naturally reaching its contractual endowment point. Unlike an endowment, which is a contractual event where the cash value equals the death benefit, surrendering the policy means accepting the accumulated cash value, which may be less than the face amount, and ending the coverage.