What is an Endowment Policy and How Can It Benefit You?

With an endowment policy, you can meet your long-term financial goals while having the reassurance of meeting the cost of unexpected emergencies. This type of plan offers a combination of life insurance cover and nearly risk-free savings benefits. The endowment plan is specifically designed to pay out a lump sum either on maturity of the policy or death of the policyholder.

What is an Endowment Policy?

An endowment policy is an insurance plan allowing the policyholder to save a certain amount regularly while benefitting from coverage for loved ones in the event of the insured’s passing. A lump sum is paid out to the policyholder on maturity of the policy if he survives the plan’s term.

The maturity amount can be used for financial goals such as paying for a child’s education, buying a home, or funding your retirement.

Meaning of Endowment Plan

Designed as a life insurance policy, the endowment policy gives the policyholder the opportunity to meet goal-based savings which is paid out after an agreed fixed period of time. Having this type of insurance policy also means beneficiaries are covered should the policyholder passed away suddenly.

Why Should You Buy an Endowment Policy?

There are numerous reasons why you should buy an endowment insurance policy and they include:

- Building wealth over a long period with regular savings.

- A lump sum payout on maturity that can be used to meet both long-term and short-term financial goals.

- A built-in life cover for loved ones in the event of a critical illness, disability, or death of the policyholder.

Buying an endowment policy encourages you to save for future needs especially if you struggle to put money aside for financial goals. Making use of an endowment plan calculator will help you decide features are best suited for your long-term financial goals. It’ll also help you get an estimate on returns based on your capital investment, additional bonuses, and predicted interest rates.

Types of Endowment Plans

• Unit Linked Endowment Plan

This type of insurance plan involves investing one part of your premium into equity, debt, or balanced funds. The other part goes towards the life cover portion of the plan. The policyholder can decide which funds to invest in depending on their risk appetite and long-term savings goals.

• Full/With Profit Endowment

With an endowment policy, the sum assured amount is decided beforehand at the beginning of the policy term. It’s worth noting that the final payout on maturity is always higher due to added bonuses depending on the performance of the policyholder.

• Low-Cost Endowment

This plan allows the policyholder to save over a certain period of time before collecting funds to pay for financial responsibilities such as mortgage repayments or loans.

• Non-Profit Endowment

Also known as a non-participating endowment plan, the policyholder doesn’t benefit from bonuses with the sum assured being fixed at the start of the policy. However, insurers offer guaranteed additions for generating returns for the policyholder on maturity of the policy.

Features of Endowment Plan

• Death Along With Survival Benefits

This insurance policy offers financial protection to the listed beneficiaries in the eventuality of the policyholder’s passing. A fixed sum assured amount is paid out as a death benefit and may include bonuses depending on the type of policy terms signed with the insured.

• Higher Returns

This plan allows for disciplined, structured savings encouraging the policyholder to build a corpus for their financial future. The survival benefit payout is higher than other insurance policies such as term plans.Premium Payment Frequency The policyholder can dictate premium payment frequency depending on the type of endowment policy taken out. Premiums can be paid monthly, quarterly, every six months, or annually.

• Premium Payment Frequency

The policyholder has the flexibility to add riders such as permanent disability, accidental death, or critical illness to their policy life cover. Some plans offer a waiver on premiums in the eventuality of critical illness or permanent disability.

• Flexibility in Cover

The policyholder has the flexibility to add riders such as permanent disability, accidental death, or critical illness to their policy life cover. Some plans offer a waiver on premiums in the eventuality of critical illness or permanent disability.

• Tax Benefits

Endowment plans fall under Section 80C and Section 10D of the Income Tax Act 1961. This means the policyholder benefits from tax exemption and deductions on premium payments and lump sum payouts. The sooner you invest in this type of plan, the more tax benefits you receive.

• Low Risk

Compared to policies such as Mutual Funds or ULIPs, an endowment policy is safer as your amount isn’t directly invested into equities or the stock market.

Benefits of an Endowment Policy

• Provide Life Insurance Benefit and Coverage

The endowment policy includes life insurance coverage for the duration of the policy term, giving you peace of mind that your loved ones are financially protected in the event of a death.

• Maturity Benefit – Lump Sum Payout

This type of plan encourages disciplined saving which results in a lump sum payout on maturity of the policy.

• Provides Tax Benefits

Premium payments on an endowment policy reduces your taxable income while there are tax benefits on the amount paid out on maturity of the plan.

• Offers Long-Term Savings

Endowment policies are designed to give you long-term savings. The fixed period of time can range from 10 to 40 years. This allows you to plan for future financial goals such as paying off a mortgage, covering your child’s education, or to support your retirement years.

• Option to Add Riders

Some endowment plans give you the option of adding riders to enhance the benefit of adding this insurance policy type to your financial profile. An endowment rider could be critical illness, permanent disability, income benefit, accidental death benefit, family income benefit, and premium waiver benefits.

• Offers Low-Risk Investment

These policies offer low-risk investment giving you the option to decide which funds to invest in depending on how risk averse you are. These plans are considered safer while offering nearly risk-free investments for the investor who doesn’t want to take too many chances.

• Serves Dual Purpose

Policyholders benefit from the dual purpose of this type of insurance plan which offers both long-term savings benefits and life cover in one package.

• Additional Bonuses

When an insurance company declares bonuses, the insured benefits as well. Additional bonuses are added to the insured’s endowment plan, increasing the sum assured payout on maturity. These bonuses are classified as follows:

• Reversionary Bonus

This is the annual declared bonus amount based on a percentage rate which is applied to the sum assured of the policy. This is paid out on maturity of the policy or as part of the death benefit paid out to beneficiaries of the plan.

• Terminal Bonus

This type of bonus is paid out on maturity of with-profit endowment policies. It’s a discretional amount based on the insurer’s investment profits made at the end of a year. Terminal bonuses are also included in lump sum payouts in the event of the insured’s passing.

Things to Know Before Buying an Endowment Plan

• Begin Planning Early

One of the ways to benefit from this type of insurance policy is to start planning early. The sooner you buy an endowment policy, the longer the plan’s tenure which results in a greater profit advantage. Investing early on in your career allows the policyholder to grow a corpus that supports long-term financial goals.

• Select a Plan That Offers Riders

Selecting a plan that offers riders enhances the features of this type of insurance policy. Insurance companies offer various endowment plans with additional riders to maximize the benefit of including this policy as part of your financial planning. While you pay more for endowment riders, the overall advantage makes it worthwhile.

• Review Flexible Premium Payment Options

Reviewing flexible premium payment options depending on your income status makes it easier to pick a policy that matches your earning potential. If you’re getting a regular salary, opt for a monthly or annual premium payment. Individuals with inconsistent incomes can opt for a limited or single premium payment option.

• Guaranteed and Non-Guaranteed Returns

When choosing an endowment policy, take into consideration guaranteed and non-guaranteed returns. The former refers to guaranteed additions which are fixed amounts and are paid together with the lump sum on maturity or as part of a death benefit payout. Non-guaranteed returns are variable amounts including bonuses that are reliant on investment performance.

• Guaranteed Addition/Bonus

Look out for an endowment policy that include guaranteed addition from bonuses declared by the insurer. This amount is distributed to the policyholder’s plan at the end of every financial year and paid out on maturity or in the event of the insured’s death.

• Claim Settlement Ratio and Process

Before buying an endowment policy, find out what the claim settlement ratio (CSR) of the insurance companies you’re reviewing. This is the ratio of the number of claim payments made to clients by the insurer to the total claims received by the insurance company. A CSR of 80% or more claim settlements made is considered a good ratio.

The process should be straightforward too so avoid policies that are complicated if you’re not an expert in this field.

• Financial Status of the Insurer

The financial status of the insurer impacts endowment policies that benefit from bonus payment. Determining the insurance company’s track record before buying into this type of plan is important to safeguard your investment returns in the long term.

If you buy a participating endowment plan you become a participant in the insurer’s growth so ensuring they have a good track record guarantees you benefit from its profits.

Final Thoughts

When comparing term insurance and endowment policies, bear in mind that the former provides life cover only while the second option offers investment opportunities as well. Owning an endowment policy means you have a financial tool for growing your investments in a safe and definite way. Plus, policyholders score from having life cover giving loved one’s financial protection in the event of a sudden death.

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