Peter Burrows, chief executive of Engage mutual, said: "This is not charitable giving or a form of Corporate social responsibility, it is a benefit we have put out there for customers.
"If you are a customer of ours you can access these funds."
He added that the sum available would be increased if the finances of the mutual allowed.
The foundation covers two types of award, community awards and hardship awards.
If member fall on hard times they can apply for one of 150 discretionary hardship grants of up to £500 for, as Burrows said: "a steady trickle of help above policy terms."
The community award will provide two grants of £25,000 and 15 grants of £5,000. It invites customer ideas for local community projects, such as village hall reroofing.
The ideas will appear on Engage's website and be put to a vote.
Burrows said: "This is a genuine customer benefit and distinguishes us in the market. It is intended as organisational brand development to show that we take mutuality seriously."
Burrows added that in the near future the mutual also intends to diversify its product base away from the over 50 plan and cash plan markets.
"We want a broader portfolio of goods we can be proud of," he said.
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