What is an Endowment Plan?
An Endowment Plan is a mix of both insurance and investment. It is a life insurance policy that provides the life cover to the insured by charging mortality cost and provide a return on investment through investing the remainder portion of the premium.The policy offers both death and maturity benefits (whichever happens earlier).Endowment policy helps you to accumulate adequate corpus along with providing financial protection in case of any unfortunate event to accomplish the financial goals in your life like child's education, marriage, post-retirement expenses, etc.
What kind of Endowment Plans can I opt from?
Typically, there are two types of endowment plans.
Traditional Endowment Plan
Traditional endowment plans are those plans that offer insurance plus investment under a single policy. Such plans are a long term life insurance contract where the policyholder has to pay premium throughout the tenure of the policy or may opt for single pay or limited payment option. The benefits under the policy are either paid out on the death of the life insured or at maturity, if the life insured survives the term of the policy. The death benefit paid under the plan is the sum assured plus the accrued bonus (if it is a with profit endowment policy) or only sum assured (if it is a non profit endowment policy) where as maturity benefits are sum assured plus accumulated bonus or guaranteed additions by the insurer.
Here the investment portion of the policy is taken care by the insurance company. The bifurcation of cost and benefits are not transparent in nature
Market Linked Endowment Plan
Unit Linked Insurance plans (ULIPs) are also categorized as endowment plans as it offers the dual benefit of insurance and investment collectively under one policy. Such plans also offer death and maturity benefits (whichever occurs earlier). Part of the premium is taken away to provide insurance by deducting mortality charges, and part of it is kept aside for investment, which is decided by the policyholder as per his/her risk appetite and is based on market performance.
A fund is created which attracts returns as per the investment made in either equity or debt instrument which is paid as fund value to the policyholder at the time of maturity. If the policyholder dies during the tenure of the plan, Sum assured or higher of Sum Assured or Fund Value is paid to the nominees and the policy ceases after that.
ULIP's are transparent and flexible in nature, and the investment steering is in the hands of the policyholder and not the insurance company.
What are the Benefits of Buying an Endowment Plan?
Following are the key benefits of an Endowment plan.
Insurance Benefit
An endowment plan offers the insurance benefit by providing the life cover or sum assured to the nominee in the event of the death of the life insured during the policy term. It ensures financial protection for your dependents in case of such unfortunate event.
Maturity Benefit
By investing in an endowment plan, you can get the lump sum amount plus accumulated bonus or the fund value at the maturity of the policy, provided you have paid all the due premiums. The maturity amount also helps you gain financial security and a huge corpus to take care of the planned financial objectives or fore post retirement life.
Guaranteed Benefits
Policyholders of ‘With Profit’ Traditional Endowment Policies are entitled to receive a portion of the profits/dividends as declared by the insurance company in the form of a bonus or guaranteed. The bonus amount may differ depending on the company’s investment & return assumptions and bonus distribution policy. For Ulip’s, there are no guaranteed benefits as the returns are based on market performance or fund performance. However, few insurer’s might add Loyalty Units to the fund in the last few years before maturity.
Rider Benefit
With an endowment plan, you can avail the option to attach riders or add on covers to enhance the protection under your policy. You can choose from various available riders such as Accidental Death Benefit, Critical Illness rider, Family Income Benefit, Waiver of Premium, etc. by paying additional rider premium amount.
Surrender Benefit
In times of liquidity crunch, the endowment policies may be surrendered as per the terms of the policy, after the lock in period of 3 to 5 years. The surrender value is however given after applying certain surrender charges which vary from insurer to insurer.
Loan Benefit
Endowment policies offer the option to avail the loan against the policy. To obtain a loan, you need to fulfill some conditions such as payment of premiums for a minimum of 3 year policy period. The loan facility under the plan helps you to fulfill the financial needs of your family and quench the immediate cash requirement.
Tax Benefit
You can get the tax benefits under Section 80 C for the premium paid for an endowment plan. The proceeds of the policy are tax free as mentioned under section 10 (10) D of the Income Tax Act, 1961.The laws are subject to change.
What are the Types of Bonus Payouts in an Endowment Plan?
There are two types of bonus payouts available under an endowment plan.
Reversionary Bonus
A bonus payout which is declared on an annual basis by the insurer and it depends on the performance of the insurer. This payout is added to the funds and payable at the maturity or death of the life insured.
Terminal Bonus
A type of loyalty bonus that reflects the performance of a ‘With Profit’ endowment policy and is paid at the maturity or the death of the life insured.