What is an Endowment plan?

Endowment plans are life insurance plans that offer life cover along with a fixed lump sum or income benefit, to the policyholder. An endowment policy can be used to build a risk-free savings corpus, while providing financial protection for family in case of an unfortunate event. This simplicity of an endowment plan has over the years made it an attractive savings plan for all.

A good endowment policy provides you with the confidence to meet any financial emergency in the future. It provides you with returns that can help you meet your non-negotiable life goals, such as your child’s education or marriage, fulfilling the needs and aspirations of your loved ones and yourself, and more.

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How Do Endowment Plans Work?

An endowment plan offers fixed returns at the end of the policy term. At the same time, the plan also offers a life cover that gives financial coverage to your loved ones in case of an unfortunate event.

In an endowment plan, you can choose the amount you want to pay as premiums, basis your requirements. The life cover offered by the plan is generally 10 times your annual premium. The returns offered by the plan are fixed at the time of the purchase of the plan. Depending on the plan you choose, you may get the flexibility to pay your premiums monthly, half-yearly, yearly, or all at once. Similarly, you may choose to get the returns from the plan as a lump sum or as regular income.

Below is an example that can help you understand this better.

Mr. Mehta is 35 years old. He is planning for his daughter's future education expenses. He invests in an endowment plan for 15 years. He chooses to pay ₹ 5 lakh every year as premium towards the plan. He gets a life cover of ₹ 50 lakh. Additionally, he will get returns on his premiums towards the end of the policy term.

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Why should you buy an Endowment Policy?

There are a lot of reasons to purchase an endowment policy. It can help you build your financial pool with regular savings. The money received at maturity can be used for various short and long term financial goals, such as a child’s education, buying a car, post-retirement goals, and more. It also helps you protect your family financially, in case of an unfortunate event, through the in-built life cover.

Benefits of an Endowment Policy 

There are broadly four benefits of an endowment policy.

• Life insurance benefit - Your loved ones are always taken care of. The life insurance benefit gives a lump sum pay-out, ensuring that even in your unfortunate absence your family members are able to continue the life you so carefully planned for them. This is a fixed amount and is given to your nominee/legal heir. Do remember some policies also give guaranteed additions and Reversionary Bonus which are considered in the calculation of death benefit

  For instance, a 35-year-old person buying ICICI Pru Savings Suraksha pays ₹ 30,000 annual premium for a sum assured on death^# of ₹ 3 lakh. So, they are getting 10 times sum assured for the premium

• Maturity benefit - As long as you pay timely premiums and keep the endowment policy active, the maturity benefit is intact. This is a guaranteed maturity benefit^~6 amount that will enable you to meet your financial goals. This maturity benefit depends on the policy term, policy premium, premium payment term, age, and gender. You may get guaranteed additions⁷ on maturity in some policies. Apart from this, in participatory policies, you may also get Accrued Reversionary bonuses and Terminal bonuses

• Tax benefit¹ - Endowment insurance plans also offer tax benefits¹. The premiums you will pay can help you reduce your taxable income under Section 80C of Income Tax Act¹. There are tax benefits available on maturity of endowment policies as well. This helps you save tax at the time of inception of the policy and accumulation stage, and also the maturity stage

• Loan benefit - Endowment policies can help you use them to get a loan. After a policy acquires a surrender value you can take a policy loan. The interest charged on such loans is quite competitive. For instance, some ICICI Prudential traditional plans offer a loan amount of up to 80% of the surrender value. The loan benefit helps you arrange funds in emergency and when all other routes of collecting funds are blocked

• Option to add riders - Endowment plans offer additional riders to enhance the coverage of the plan. You can add a critical illness rider, an accidental death rider, or a permanent disability rider and enjoy increased protection

• Low risk - An endowment policy is usually a low-risk investment. Your money grows over time with most endowment products and your returns are guaranteed

• Dual purpose - You get to enjoy the dual benefit of insurance as well as investment. Your savings continue to build over time and your family stays secure in the case of an unfortunate event

Salient features of an Endowment Policy

Endowment policies offer a whole range of features. Let us go through them, one by one.

• Guaranteed savings no matter what - An endowment policy gives fixed returns. So, your financial goals and family's future are always in safe hands

• Dual Benefits - Endowment policies provide dual benefits of savings and life cover. Plus, the returns are tax-free so real returns are higher

• Premium flexibility - Premium payment can be done on monthly, half-yearly, and on yearly basis

• Zero risk - Endowment plans come with zero risks for you. As long as you pay premiums on time, all your benefits are safe. There is zero risk

• Earn bonus - Endowment plans offer additional bonuses. The bonuses^&8 is the extra amount of money which a policyholder can get

• No market risk - Endowment policies are non-linked. In these policies will not be dependent on

Who should buy an Endowment Policy?

An endowment policy is suitable for anyone from a young professional to a senior citizen. Most of us have family responsibilities that we need to take care of. Also, most of us have long term non-negotiable goals that need to be achieved no matter what.

If you are looking for a low-risk plan with the two-in-one benefit of insurance and investment, go for an endowment policy.

If you are looking for lump sum maturity for long-term goals, an endowment plan is suitable for you.

If you want to save small amounts of money over the long-term and get tax benefits, an endowment policy is best for you.

If you want zero risks in an investment, endowment plan is the one you should consider.

Things to consider before buying an Endowment Policy

The market is flooded with different endowment policies. How do you find the best one? The answer is easy if you know what the things you need to look at are.

• Affordable premium - The cost of the premium is probably the first thing insurance customers look. Since endowment policies are a long-term financial commitment, an affordable premium is a must. A very big premium amount may lead to a situation when you are forced to stop due to exigencies

• Guaranteed addition/bonus - Some Endowment policies offer guaranteed additions (GAs)⁷. Guaranteed Additions (GAs) are added to the policy at the end of every policy year if all due premiums have been paid. This addition is paid as a rate of all premiums paid so far. This means you will get continuous rewards for continuing with a policy

• Claim settlement ratio and process - You must choose an endowment policy from an insurer who has a high and consistent claim settlement ratio. Additionally, a simple and fast claim process should be preferred. Buy policies from an insurer where claims can be reported online, at branches, central office, SMS or email etc

• Financial status of the insurer - Storms can't uproot trees with deep roots. The financial strength of an insurer is vital. Buy endowment policies from an insurer who has an independent certification of financial strength. For instance, ICICI Prudential Life Insurance has been rated iAAA since 2009 by rating agency ICRA. This Claims Paying Ability rating measures an insurance company’s ability to meet policyholder obligations 

• Flexible premium payment options - Invest in a plan that allows you to pay premium monthly, quarterly, or annually, so that it suits your income pattern

• Option to add riders - Riders can provide you with increased benefits. Make sure to look for an insurer that lets you add riders to your policy to enhance the scope of the coverage

• Plan early - If you buy an endowment life insurance plan early, not only do you get lower premiums with a high sum assured, you can also choose a long policy term and generate a large savings fund over time

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