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Endowment Policy - Meaning, Types & Benefits

dateKnowledge Centre Team dateMay 18, 2021 views157 Views
Endowment Policy - Meaning, Types & Benefits

Endowment plans are one of the most popular life insurance policies. The long-term safety of capital and a guarantee of returns make it one of the best savings options for important financial goals. The life cover in endowment plans makes them a preferred investment for goals that you would want to achieve. Endowment life insurance plan is a good investment option for financial goals such as:

i. A child’s higher education
ii. Daughter’s marriage
iii. A dependent relative's or family member's financial security
iv. Preservation of wealth for a long time
v. Legacy or wealth distribution to the next generation.

Tax savings and tax-exempt maturity mean your wealth will be safe from the taxman. The long tenure of investment means you can use the plan to not only preserve the wealth but also pass it on without tax liability to the next generation.

What is an Endowment Policy?

An endowment policy is a type of life insurance policy that offers lump sum amount on maturity or on death. An endowment policy helps the policyholder to build a risk-free savings corpus and offers financial security to the family if there is any unfortunate event. An endowment policy offers life cover along with the benefits of a savings plan.

You can save regularly over a specific period to accumulate a significant corpus that you can enjoy at maturity. If the policyholder survives the policy term, they will get the Sum Assured in a lump sum. An endowment policy is a good option to help you meet financial goals such as the education of your children or their marriage, purchasing a house or even planning your retirement.

How does an Endowment Policy Work?

An endowment plan involves both a death benefit and a maturity benefit. These will be available provided you pay all your premiums.

1. If you die during policy term

In this case, your family members will receive a death benefit. This is the sum assured that is decided at the start of the policy.

Along with this sum assured, your family will also receive the guaranteed yearly additions or any other bonus depending on the policy.

2. If you survive the policy term

If you survive your endowment policy’s term, then you will receive a maturity benefit. This is the guaranteed sum that you will receive at the end of the policy. Other benefits, such as guaranteed yearly additions and loyalty additions, are also available.

What are Different Types of Endowment Policies?

Endowment plans are considered one of the best financial tools that can help you achieve your milestones. Hence, it is necessary that you know the various types of endowment plans before buying one.

Listed below are five different types of endowment plans that you can choose from as per your financial requirements and circumstances:

1. Unit Linked Endowment Plan

In unit linked endowment plans, the premium that you pay is divided into 2 parts. One part is used to purchase units in different investment funds as per your preference, and the other part goes toward your life insurance cover. This is often termed a Unit Linked Insurance Policy (ULIP) – one of the best saving plans that investors usually put their money in.

2. Guaranteed Endowment Plan

As the name suggests, under this plan, the policyholder receives guaranteed benefits. At maturity, the policyholder gets the Sum Assured along with any loyalty additions, if any. Apart from that, with the Guaranteed Savings Plan, if the policyholder survives the term, they will receive:

i. Guaranteed Sum Assured on Maturity, plus
ii. Guaranteed Yearly Additions, plus
iii. Guaranteed Loyalty Addition

Learn more about Guaranteed Savings Plan.

3. Full/With Profit Endowment Plan

The policyholder receives the Sum Assured as promised at the time of buying the policy. However, depending on whether or not the company declares a bonus, the final payout, including the surplus amount, may be higher upon policy maturity or the death of the insured.

4. Low-cost Endowment Plan

Under such a plan, the life insured is allowed to accumulate funds, which are usually paid after a determined period. This plan is specially designed to help the policyholders build a corpus to secure their future or to help them pay off their loans and mortgages. Even if the policyholder passes away while the policy is in force, the nominees or beneficiaries will receive the Sum Assured.

5. Non-profit Endowment Plan

Such endowment plans offer guaranteed additions instead of bonuses since they do not participate in the profits of the life insurance company. This helps generate returns for the policyholder and also makes them attractive as compared to other plans in the market.

What are the Features of an Endowment Insurance Plan?

Endowment plans provide the dual benefit of both savings and life insurance coverage in a single plan. However, this is not the only feature of an endowment policy. Listed below are some of the features of an endowment plan:

1. Security of a Life Cover

You can choose your life insurance cover before buying the endowment policy. This is the amount that will be provided to your family if you pass away during the term.

You can also choose your riders in the policy. Factor in all your family’s future needs before deciding on a suitable financial cover.

2. Guaranteed Returns

An endowment plan helps you to build a savings habit. You are required to pay the premiums regularly. The amount you contribute to the policy earns a fixed rate of interest. At the maturity of the policy, you will receive a guaranteed sum with interest and other additions. That is, you are assured of the amount and thus can plan your future.

3. Flexibility in Premium Payment

You are given full flexibility to choose the mode and frequency of which you pay your premium. You can pay the life insurance premium on a monthly, quarterly, half-yearly or annual basis as per your preference.

You can also select the limited payment option, which allows you to pay your premium for a limited time and enjoy the benefit later.

4. Low Risk

The returns in endowment plans are guaranteed. You are aware of the returns that will be generated under the policy. Thus, no risk or very low risk is involved in an endowment policy.

5. Bonus

The benefits that are present in the policy, i.e., both death and maturity benefits are further increased thanks to bonuses. Endowment plans include bonuses in the form of guaranteed yearly additions, interim bonuses, revisionary bonuses, etc.

Benefits of Buying an Endowment Policy

An endowment plan allows you to save for various goals of life. Buying a money back plan or endowment plan makes it easier for you to achieve your financial goals while protecting your loved ones. Here are a few benefits of buying an endowment policy:

1. Financial Cover

Endowment plans include a death benefit amount. An endowment plan covers your life financially as it is a type of life insurance policy. If you die during the term of the policy, your family will receive a sum assured, which is decided at the time of the purchase. At the time of death, if your policy has accrued any bonuses, they will also be added to the sum assured.

2. Maturity Value

An endowment policy is more than just a protection plan. This is a type of life insurance that, along with offering death benefits, also includes a maturity value. That is, if you survive the policy term, then you will still receive an amount. If you have been paying your premiums, then you will get this benefit for sure.

This value depends on the policy type and the insurer and can be used to achieve your goals.

3. Addition of Riders

You can further enhance your endowment plan with the help of riders. Riders are the additional benefits that help broaden the scope of your existing policy. With the help of riders, you can enhance your sum assured and cover those situations that the base policy doesn’t.

4. Tax Exemption

Endowment plans can also help you save on taxes as well. Tax on the premium paid can be saved under Section 80C, and the maturity amount, including the final payout, is also deductible under Section 10(10D) of the Income Tax Act.

What are the Riders Available in an Endowment Insurance Policy?

Riders always help you to enhance the in-built features and benefits of the plan. Remember that riders are optional, and hence, you need to include them in your plan if you want additional benefits. Riders may vary from plan to plan. However, we have listed below a few common riders that you may find with the endowment plans.

1. Premium Waiver

If something unfortunate happens to the policyholder, such as they suffer from a lifestyle disease or they meet an accident, the life assured will not be liable to pay the remaining premiums. And the remaining premiums will be waived off by the insurance company.

2. Terminal/Critical Illness

The policyholder will get a lump sum amount in case they are diagnosed with a terminal illness. That amount can be used to pay off the hospital expenses, and you will not have to dip into your savings when you witness such an emergency.

Read about critical illness benefit under life insurance plans.

3. Accidental Death Benefit

If the policyholder passes away due to an unfortunate event, the insurance company will pay an additional death benefit along with the existing death benefit to the beneficiaries or nominees.

Who should Buy an Endowment Plan?

If you are the primary earner in your family, then you must buy an endowment policy. In simpler terms, any individual who has a regular source of income and who has the responsibility of caring for their loved ones should invest in an endowment plan. You can buy an endowment plan if you are:

i. A salaried employee
ii. Self-employed individual
iii. Businessman

With the best endowment plan, you do not have to risk a lot to gain returns.

When should you buy an Endowment Life Insurance?

An endowment life insurance policy helps you save in a disciplined manner and, at the same time, protects your life. Anyone over the age of 18 who earns money should invest in an endowment plan.

But you should consider buying an endowment plan if you can relate to the following situations:

i. To protect your family members financially even after you are not present with them.
ii. If you want to have a plan with a long-term horizon.
iii. If you want to create a risk-free corpus to achieve goals such as a child’s education or a daughter’s marriage.
iv. If you are looking for a safe investment to park your funds and want to save taxes.

Assess your current income and expenses before purchasing an endowment plan. Learn how much you can spend on premiums and choose a plan accordingly.

Things to Consider before Buying an Endowment Insurance Policy

The most important thing to consider is the return on investment factor while choosing an endowment plan. However, there are a few things that cannot be overlooked:

1. Plan Early

The earlier you invest, the longer your investment horizon will be and the higher the returns that you will reap over the long term. It also helps build the discipline of saving regularly over time to build a corpus for important milestones in life.

Learn how saving at an early age will help you later in life.

2. Select Riders based on your Requirements

Most insurers offer riders as inbuilt coverage, and you must use them to the fullest. Some companies might also offer a double endowment policy, or education or marriage endowment plans.

3. Premium Amount

Endowment policies are generally taken from a long-term perspective. This is due to their duration, which is generally more than 10 years. This will mean that you will have to pay premiums for the long term. You should check whether the premium amount is affordable and whether you can continue without defaulting, as non-payment of your premiums on time can lead to the cancellation of the policy without benefits.

4. Payment Flexibility for Premiums

You can choose to pay a single, one-time life insurance premium or a limited number of premiums if your income is irregular, whereas salaried professionals can opt for a regular endowment policy.

5. Returns Offered

Many endowment policies offer both guaranteed and non-guaranteed returns. Guaranteed returns are declared upfront while purchasing the policy and are assured on policy maturity or the death of the insured. Non-guaranteed returns, such as bonuses, are variable in nature and are at the sole discretion of the insurance company.

6. Guaranteed Addition/Bonus

Endowment policies include bonuses. This is the additional amount that you receive yearly if you pay your premiums regularly. This is often paid as a percentage of the premium. Each policy has a different rate. Bonus is the additional amount you get from the insurance company for your endowment plan. This is present in the endowment policies that are profit-linked.

A bonus is provided if the company registers profits. This helps enhance your maturity benefits without any additional costs. Consider the plans that give out bonuses.

7. Claim Settlement Ratio and Process

The claim settlement ratio (CSR) is one of the most important factors you should check. This can be seen as a parameter to judge the viability and trust of the insurance company. This ratio tells you the percentage of the claims that the company settled from the total claims it received. The higher the CSR of the insurance company, the better the chances of your claim settlement.

Also, go through the process of claim settlement with the insurer. Choose an endowment plan from a provider where the settlement process is simple and quick.

Are Endowment Insurance Policies Suitable for you?

An endowment plan is one of the safest plans around in the market. It offers you life coverage for a certain period of time and also ensures that you receive a maturity sum after your policy comes to an end.

The maturity amount here is guaranteed and is also enhanced by the policy’s yearly additions and other benefits. Thus, this amount can be used to achieve your long-term goals.

So, if you have a goal that you want to achieve some years down the road and it requires a lump sum of money, then you can surely consider this plan. Some of the goals that you can look to achieve with this plan are money for your child's marriage, education, and planning an abroad trip.

This can also be used if you want to park your lump sum fund in a risk-free asset.

How to Buy the Best Endowment Plan in India?

While searching for an endowment plan, you must consider a few things to buy the best endowment plan available in India. You must take into account your income, outgoings, any servicing or existing debts, current life stage, and risk appetite. Also, the premium that you have to pay is another important factor that you must consider while looking for an endowment plan.

Endowment Policy | How to Buy the Best Endowment Plan?

Check the claim settlement ratio of the insurance company before you make a decision to buy the plan, as you must know the degree of ease and convenience of dealing with the insurance company. Ensure you read the terms and conditions before signing on the dotted line to stay on the safe side.

Here’s everything about claim settlement ratio.

Claim Process of Endowment Plans

If you die during your endowment plan, then your family needs to file a claim to receive the death benefit.

1. Fill the Claim Form

This form is part of the set of forms that are to be submitted to the provider to initiate the claim. The claim form should be signed by the beneficiary or the nominee of the endowment policy.

Here are the documents that may be required

i. Loss statement from the last treating doctor
ii. School or the college certificate
iii. Employer certificate
iv. Certificate from the treating hospital
v. Death Claim form (also known as Form C)

Apart from this, insurers also ask for the statement of the witness who was present at the time of the cremation rituals.

If the death was due to unnatural causes, then a post-mortem report or an investigation report in the case of a police case is also required.

2. Verification

After you submit these forms, they will be verified by the insurance company. After successful verification, the claim will be provided.

Endowment Plan vs Money Back Policy

Both endowment plans and money-back plans are types of life insurance policies that offer both death and maturity benefits. But these plans have certain differences as well. These are given in the table below:

BASIS Endowment Plan Money-Back Plan
Meaning It is a type of life insurance plan that provides the benefit of a life cover as well as an opportunity to save. This is a type of plan that provides you with a certain sum at regular intervals
Duration 10-30 years 15-20 years
Death Benefit Yes Yes
Maturity Benefit Maturity benefit is provided after the policy term is over Maturity benefit is paid in the form of regular payments that starts during the policy.
Nature of Payout Lumpsum Instalments
Loan Facility You can take a loan from your endowment plan after the policy acquires a surrender value A loan facility is not available
Suitability If you want to save money for a long term goal If you are looking for a regular payout to meet your short-term needs.

Endowment Plan vs Term Insurance Plan

BASIS Endowment Plan Term Plan
Meaning It is a variant of a life insurance plan that helps you to build your savings along with providing life cover This is a type of plan that offers to cover your life for a specific duration.
Purpose For the protection and to achieve goals For protection only
Duration 10-30 years 10-40, some plans offer a cover-up to the age of 99*
Maturity Benefit A guaranteed maturity benefit is provided after the policy term is over There is no maturity benefit in a term plan. However, there is a return of premium options
Affordability This plan is slightly more expensive than the term plan Term plan is one of the most affordable life insurance plans
Sum Assured Lower High sum assured due to the plan being only for protection.
Nature of Payout Lumpsum (both death and maturity benefit) Lump-sum death benefit
Bonus Present, in the form of loyalty additions and yearly additions Not present
Loan Facility You can take a loan from your endowment plan after the policy acquires a surrender value A loan facility is not available in the case of a term plan
Suitability If you want to save money for a long term goal It is a necessary plan if you want to protect your dependents at an affordable price

Documents Required to Buy an Endowment Plan

You can purchase an endowment plan either online or offline. The first step involved in purchasing the plan is to fill out the application and the proposal form. After filling out this form, you need to submit certain documents. Be sure that you have all the important documents ready that are necessary for buying the plan.

Given below is the list of documents requested by the insurance providers to carry out the purchase of an endowment plan. You can either submit these offline or through the company’s website.

i. Passport Size Photograph
ii. Age proof (birth certificate)
iii. Identity proof (AADHAR card, PAN card, etc)
iv. Address proof (AADHAR card, Voter ID, copy of bills, etc)

All these documents must be original. If any discrepancy is found, your application can be cancelled and you may face charges.

Frequently Asked Questions (FAQs) for Endowment Policy

Being a type of life insurance plan, an endowment policy does offer a life cover. That is, it includes a death benefit. This death benefit will be paid to your beneficiaries in the event of your death during the term of your endowment plan.

The death benefit is the sum assured that you decide at the time of purchasing the policy. However, it can be the following if the amount is higher:

i. 105% of Total Premiums Paid as on date of death, or
ii. Guaranteed Sum Assured on Maturity
iii. 11 times the annualised premium

An endowment plan is one of the safest insurance plans available in the market. One of the main features of an endowment plan is its ability to offer you guaranteed returns at the time of maturity. That is, you are assured of a certain amount once your policy expires. This makes the plan very reliable. You can use this to plan for a long-term goal.

Endowment plans offer you an additional sum in the form of bonuses. These get added to your sum without any additional cost.

These bonuses are

i. Guaranteed Yearly Additions
ii. Guaranteed Loyalty Additions

These are declared by the insurance companies, often as a percentage of the sum assured.

The premium is the amount you pay to keep your endowment plan active. The premium amount is determined by a lot of factors and thus differs from person to person. Here are the factors that affect the premium:

i. Age
ii. Gender
iii. Sum assured
iv. Duration
v. Lifestyle and habits
vi. Medical History

You should purchase an endowment policy as early as possible. There is no particular time that is right to purchase this plan. If you have dependents and there are goals that you want to achieve in the future, then you can consider this plan.

The duration of an endowment policy varies from 10–20 years. The premium payment period is from 5–10 years.

You are eligible to purchase a term plan at the age of 18. The maximum age of maturity is 75 years old. As a result, the maximum age for purchasing a 20-year term plan is 55 years old.

Yes, you can purchase an endowment plan for your child. Most of the endowment plans, such as Canara HSBC Bank of Commerce Life Insurance, Guaranteed Savings Plans, have a minimum age of 0 years, thus you can purchase this plan as soon as your child is born.

Another way you can purchase this is by naming your child as the beneficiary in the endowment plan. This will help him achieve his financial goals.

There is no limit to changing the nominee. Nominees are the individuals that you nominate to receive the money after your death. These can be your wife, children, parents, or even a charity/trust. You can appoint more than one nominee in your endowment policy. The last stated nominee before your death will receive the sum.

Because they will be the ones to receive the sum assured, you should take your time in making your decision.

An endowment plan, majorly a with-profit plan, includes a terminal bonus. This bonus is paid out from the profits that your insurance company has earned through its investments.

Terminal Bonus is a one-time payment and is receivable at the time of

i. Death of the insured
ii. Maturity of the policy

This is also a type of additional amount that is provided with an endowment plan. A reversionary bonus is usually a percentage of the sum assured and is paid out when the person dies or the policy matures.

Yes. Bonuses are an integral part of an endowment plan. These enhance the sum that you will receive at the time of maturity at no additional cost. You must pay all due premiums on time in order to receive the bonus additions.

If you fall under any of the following categories, then you should consider purchasing an endowment plan.

i. Over the age of 18 and want to build a saving habit.
ii. Are you now at the earning stage of your life?
iii. Want to achieve a long-term goal?
iv. Want to park your funds in a safe scheme?

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