An endowment policy is basically a life insurance policy, but after a certain amount of time, or when the holder dies, a certain amount of money is given to someone. In the case of some policies, it is possible to handle the money when there is an extreme case of illness involved. There are different types of endowment policy contracts, and in most cases, they have their own different advantages and reasons why they exist.
There are the traditional with profits endowments, unit linked endowments, full endowments, low cost endowments, traded endowments, and modified endowments. The modified endowment has less than seven level annual premiums, and other endowments can be changed to a modified endowments.
Why Were Modified Endowments Created?
Modified endowments were created by the Technical Corrections Act of 1988. The were created because some were using single premium life endowments as a sort of tax shelter. Before the Technical Corrections Act, it was completely possible to obtain large amounts of money from an endowment policy tax free. Now, when money is taken from this endowment, it is not exempt from taxes. It really does not matter how money is taken, it is now completely subject to taxes.
These modified endowments have less than seven level annual premiums, and it is possible for them to be exposed to more restricting tax requirements. In addition, it is possible for these endowments to be forced to follow annuity rules. It is possible for other endowment policies to fit under the modified endowment category if the policy is changed and fits under the seven pay rules. Once an endowment is classified as a modified endowment contract, it is always with that label, and it cannot be changed.
However, all endowments created before June 21 1988 is not subject to these rules unless they change materialistically. All policies that were entered after June 20, 1988 and all policies that change after that date is subject to be studied under the modified endowment policies.