Before looking at what and how important your endowment policy is to you as an individual or an organization, it is imperative we look at the definition and what it really is.

Definition: The ordinary meaning of the word Endowment itself is simply A fund that is made up of gifts and bequests that are subject to a requirement that the principal be maintained intact and invested to create a source of income for an organization. Donors may set up an endowment to fund a specific interest; and a nonprofit's governing body may set up an endowment. In any case, an endowment requires that the principal remain intact in perpetuity, or for a defined period of time or until sufficient assets have been accumulated to achieve a designated purpose.

It is also a fund that is restricted. Only the interest from the fund can be spent, not the principal that anchors the endowment. Usually, only a portion of the interest or earnings from the endowment (typically 5%) are spent on an annual basis in order to assure that the original funds will grow over time. Professional money managers often oversee endowment funds, investing the money in stocks, bonds, and other instruments.

The essence of an endowment is to ensure stability of fund. An endowment helps diversify your organization's income and reduces your dependency.

What Is Endowment Policy?

An Endowment policy is actually an insurance policy by which a stated amount is paid to the insured after the period of time specified in the contract, or to the beneficiaries in case the insured dies within the time specified .it can also be seen as a life insurance contract designed to pay a lump sum after a specified term (on its 'maturity') or on earlier death. Typical maturities are ten, fifteen or twenty years up to a certain age limit. Some policies also pay out in the case of critical illness.

Endowment policies cover the risk for a specified period at the end of which the sum assured is paid back to the policyholder along with all the bonus accumulated during the term of the policy. It is this feature - the payment of the endowment to the policyholder upon the completion of the policy’s term - which rightly accounts for the popularity of endowment policies. Policies are typically traditional with-profit or unit-linked (including those with unitized profits funds).

An endowment policy is often used to pay off an interest-only mortgage. There are two parts to it - an investment part and a life cover part - and it lasts for a set time. If you die during the policy, it pays off your mortgage debt. If you live until the policy ends, the investment part should give you enough to repay your mortgage, but this is not guaranteed.

Endowments can be cashed in early (or 'surrendered') and the holder then receives the surrender value which is determined by the insurance company depending on how long the policy has been running and how much has been paid in to it. A tax free benefit is paid out at maturity or on earlier death (assuming a qualifying policy).

The policyholder may sell the policy in the traded endowment market, as an alternative to surrender before the end of the term, although this must be carefully considered as financial penalties will often apply.

There are charges on all endowment policies and the Key Features document from endowment providers will explain these.
Early surrender will usually incur further charges from the provider. Policy contracts are assignable, allowing the assured person to irrevocably pass the beneficial rights to a third party such as a mortgage Lender, a bank, or an investor in traded policies. A regular premium is paid (normally monthly) to a Life Assurance company. A small part of this premium goes towards providing live cover to the original lives assured, but the bulk of it provides funds for the life company to invest for the term of the contract. The profits earned on this investment are apportioned annually to each policy. This is how the final maturity value builds up in a policy.