Simplifying Life Insurance in India
What is an Endowment Life Insurance Policy & It's Features
In today's world, where financial security and careful planning are crucial, endowment plans stand out as a powerful option. They offer a unique combination of insurance protection and investment growth, making them an appealing choice for those who want to secure their loved ones' future while building a robust financial foundation.
Endowment plans provide peace of mind in case of unforeseen events and open doors to financial opportunities that can shape your future. Whether you're an experienced investor or just starting to explore your financial options, understanding how endowment plans work can help you make confident, informed decisions.
Table of Contents
Endowment Plan Overview
The table below highlights the key features of the endowment plan, covering important aspects like sum assured, eligibility, premium options, and available riders.
What is an Endowment Plan?
An endowment plan is a life insurance policy that combines a death benefit with a savings component. It offers financial protection for your loved ones while helping you build savings over time.
With regular premiums, you gain both insurance coverage and a growing financial reserve. Upon maturity, you can use the savings for goals like education, buying a home, or retirement. These plans provide flexibility to meet your long-term financial needs.
How Does Endowment Plan Work?
An endowment plan is a type of life insurance policy that combines insurance protection with savings. It not only offers life cover but also helps you accumulate a lump sum amount over a specified period. Here’s how an endowment plan works:
- Sum Assured: The endowment plan provides a sum assured, which is the amount paid to the policyholder at maturity or to their beneficiaries in case of the policyholder’s unfortunate death during the policy term.
- Policy Term: The policy has a predefined term chosen by the policyholder when purchasing the plan. During this term, the policy remains active as long as the premiums are paid on time.
- Premium Payments: Policyholders are required to make regular premium payments to keep the policy active. The premium depends on factors such as the sum assured, the policyholder's age, the policy term, and any additional riders opted for. Unlike pure-term plans, an endowment plan is slightly more expensive because it combines life insurance with a savings component.
- Maturity Benefit: If the policyholder survives the policy term, they will receive a maturity benefit, which includes the sum assured along with any bonuses declared by the insurance company. This acts as a financial cushion for future needs, such as retirement or large expenses.
- Death Benefit: In the event of the policyholder’s death during the policy term, the nominee will receive the sum assured along with any applicable bonuses as a death benefit.
- Financial Growth: Since endowment plans also act as a savings vehicle, they allow policyholders to build a financial corpus over time. The savings component grows throughout the policy term, ensuring both life cover and financial returns.
- Rider Benefits: Policyholders can enhance their endowment plan by adding riders such as critical illness riders, accidental death benefit riders, or waiver of premium riders, offering additional protection by paying an extra premium.
Illustration
Let’s take a hypothetical example to better understand how an endowment plan works.Ravi, a 40-year-old entrepreneur, wants to build a secure financial corpus for his children’s education and secure their future in case of any unforeseen events. He chooses an endowment plan with a sum assured of ₹50 lakhs and a policy term of 20 years. His premium payments are set annually, and he adds a critical illness rider for additional coverage.
Scenario 1: Death During the Policy Term
If Ravi passes away within the 20-year policy term, his family will receive the sum assured of ₹50 lakhs plus any accrued bonuses. This payout will help cover important financial obligations and provide a secure future for his family.
Scenario 2: Outlives the Policy Term
If Ravi survives the 20-year policy term, he will receive the maturity benefit of ₹50 lakhs along with any bonuses accumulated during the policy term. This amount can be used to fund his children’s education or other financial goals.
Disclaimer: The above illustration is a hypothetical example created for educational purposes only and does not represent a real-life scenario. Please refer to your policy documents for specific terms and conditions.
Types of Endowment Plans
1. Unit-Linked Endowment Plans (ULIPs)
These plans combine insurance with investment in market-linked funds, such as equity, debt, or hybrid options. They offer the potential for high returns based on market performance, making them suitable for individuals with a higher risk tolerance. Note that returns are not guaranteed and vary with market conditions.2. Full Endowment Plans (With-Profit)
These plans guarantee a sum assured that is paid to the nominee upon the policyholder's death. If the policyholder survives the term, they receive the sum assured plus any non-guaranteed bonuses. This type provides a blend of guaranteed returns and potential additional benefits.3. Non-Profit Endowment Plans
Like full endowment plans, these provide a guaranteed sum assured but do not include bonuses. They offer guaranteed policy additions as part of the maturity benefit, providing stability and predictability without the potential for additional non-guaranteed returns.4. Low-Cost Endowment Plans
These plans offer a guaranteed lump sum either on maturity or in the event of death but without bonuses. They are often chosen to meet specific financial goals, such as paying off a mortgage and providing a safety net for the policyholder's family.5. Unitized With-Profit Endowment Plans
These plans combine guaranteed returns with the possibility of non-guaranteed bonuses. They balance safety and the potential for higher growth, depending on the insurer's performance and market conditions.6. Guaranteed Endowment Plans
These plans ensure a lump sum payout at maturity, with possible additional loyalty additions. They are ideal for individuals seeking certainty in returns, providing a predictable financial outcome.7. Limited Premium Payment Endowment Plans
These plans allow you to pay premiums for a shorter period while enjoying coverage for a longer term. For example, you might pay premiums for ten years but receive benefits for twenty years, making it a flexible option for managing cash flow.8. Money-Back Endowment Plans
These plans provide periodic payouts during the policy term, with the remaining sum assured and bonuses paid at maturity. They are suited for those who need regular returns, offering a blend of periodic income and a lump sum.Key Features and Benefits of Endowment Plan
1. Guaranteed Returns with Life Cover
Endowment plans offer a guaranteed lump sum payout at the end of the policy term, ensuring financial security for your beneficiaries if you pass away and a substantial sum if you survive the term. This dual benefit provides both insurance protection and a financial reserve.2. Flexibility and Liquidity
These plans allow you to access funds during emergencies by foreclosing the policy after the lock-in period. This flexibility helps you manage immediate financial needs while maintaining the policy’s value.3. Tax Benefits
Premiums paid on endowment plans qualify for tax deductions under Section 80C, and the maturity amount is tax-free under Section 10(10D). This tax advantage reduces your overall tax burden and enhances the plan's financial benefits.4. Low-Risk Investment
Endowment plans are designed as low-risk investment options, offering better returns than traditional savings accounts. The insurer manages the investments, ensuring stability and security for your funds.5. Loan Facility
You can use your endowment policy as collateral to secure a loan, allowing you to access additional funds without jeopardizing your assets. This feature provides financial assistance while keeping your policy active.6. Balanced Insurance and Investment
Endowment plans combine life insurance with investment benefits, ensuring that you or your beneficiaries receive financial benefits whether you survive the policy term or not. This balance makes them a comprehensive financial tool.7. Long-Term Financial Planning
Endowment plans are ideal for meeting long-term financial goals such as education or retirement. They support future milestones with guaranteed payouts and accumulated bonuses, helping you plan for significant life events effectively.Why Do You Need an Endowment Life Insurance?
While life insurance policies with just a death benefit are popular, many people are looking for policies that provide both insurance protection and a savings component. This is where an endowment life insurance plan comes in - it not only protects your loved ones in case of unfortunate events but also ensures you save for future financial goals.
Here are other major benefits that an endowment life insurance plan provides:
- Dual Benefit of Savings and Protection: An endowment plan offers life insurance coverage along with a savings component. This means your family will be financially secure in the event of your demise, but if you survive the policy term, you’ll receive a lump sum maturity benefit that can help you meet major financial goals.
- Steady Financial Growth: Endowment plans allow your savings to grow with time, thanks to bonuses that may be added to the policy. This growth ensures that you accumulate a significant amount by the end of the policy term, which can be used for retirement, children's education, or any other future expenses.
- Tax Benefits: Premiums paid towards the policy are eligible for tax deductions under Section 80C, and the maturity or death benefit received is tax-free under Section 10(10D) of the Income Tax Act, as per the prevailing tax laws.
Some Relatable Real-Life Examples
1. Rajiv Sharma, Government Employee
Rajiv, 45, a senior government employee, is looking forward to retirement in the next two decades. However, he also wants to ensure that his wife is financially secure in case of his sudden demise.
Rajiv chose an endowment plan with a sum assured of ₹50 lakhs. Not only does it give his family protection in case something happens to him, but it also helps him systematically save for a comfortable retirement, thanks to the maturity benefits at the end of the policy term.
2. Neha Malhotra, Software Engineer
Neha, a 30-year-old software engineer, recently became a mother and wanted to secure her child's future while also building a financial corpus. She opted for an endowment plan with a sum assured of ₹30 lakhs, which gives her peace of mind knowing that in case of any unforeseen event, her family will be taken care of.
At the same time, if she outlives the policy term, she will receive a lump sum amount that can be used for her child's higher education or other major expenses.
3. Meera Kapoor, Small Business Owner
Meera, a 40-year-old small business owner, has big dreams for her children’s education and family’s future. She wanted a plan that offers both life insurance protection and savings. She opted for an endowment plan with a sum assured of ₹25 lakhs.
With this plan, Meera feels secure that her children will have a financial safety net if she’s not around, and if she survives the policy term, the savings she accumulates will help fund her children’s higher education.
Who Should Buy an Endowment Plan?
Endowment Plans are ideal for individuals seeking a combination of financial coverage and a disciplined approach to building savings. Consider buying an Endowment Plan if you wish to:
- Seek a low-risk investment with financial coverage: Ideal for those who prefer stability over high-risk, high-reward investments, an endowment plan offers the security of guaranteed returns with life cover.
- Have specific long-term financial goals: If you’re looking to build a lump sum for non-negotiable goals like education, marriage, or retirement, an endowment plan can help you achieve this with disciplined savings.
- Have a regular income: These plans suit those who wish to invest small amounts regularly, ensuring a steady buildup of a corpus over time.
- Secure your dependents financially: If you have dependents, this plan ensures their financial security with a guaranteed sum assured in case of your untimely demise.
- Prefer lower but guaranteed returns: Endowment plans provide lower but guaranteed returns without exposure to market risks for risk-averse individuals.
Eligibility Criteria for Buying Endowment Plan
While the requirements may differ slightly between insurers, here’s a general outline of the standard eligibility criteria for an endowment plan.
Documents Required for an Endowment Policy
When purchasing an endowment life insurance policy, the following documents must be ready to ensure a smooth application process.
Note: Depending on the insurance provider, each section requires one or two documents as proof. Therefore, kindly confirm with your insurance provider.
How to Calculate the Premium for an Endowment Plan?
To determine the premium for an endowment plan, you need to account for several factors, including the policyholder's age, health, lifestyle, sum assured, policy term, and any additional riders. Let’s walk through an example to illustrate the calculation.
Consider the following details for our example policyholder, Arjun Patel:
- Age: 30 years
- Health: Non-smoker
- Policy Term: 20 years
- Sum Assured: ₹10 lakhs
Insurance companies calculate premiums based on these variables. For an endowment plan, the calculation generally includes a base rate determined by the insurer, which takes into account the sum assured, age, and health status. Additionally, riders and policy terms can affect the final premium.
Let’s assume the base rate for this example is ₹50 per thousand of the sum assured. Here’s how the premium is calculated:
Base Premium = (Sum Assured/1,000) × Base Rate
For this endowment plan:
Base Premium = (10,00,000/1,000) × 50 = ₹50,000 per year
In this example, the base premium amounts to ₹50,000 annually. This premium reflects the policyholder’s age, healthy lifestyle, and the sum assured.
Bonuses
Endowment plans often include bonuses, which are additional amounts added to the sum assured. These can be reversionary bonuses (added annually) or terminal bonuses (added at the end of the policy term).
Let’s assume a reversionary bonus of ₹50 per ₹1,000 of the sum assured is declared annually.
Annual Bonus = (Sum Assured/1,000) × Bonus Rate
Annual Bonus = (10,00,000/1,000) × 50 = ₹50,000 per year
Over 20 years, the total reversionary bonus would be:
Total Reversionary Bonus = 50,000 × 20 = ₹10,00,000
Maturity Benefit
The maturity benefit is the sum assured plus the total bonuses accumulated over the policy term.
Maturity Benefit = Sum Assured + Total Reversionary Bonus
Maturity Benefit = 10,00,000 + 10,00,000 = ₹20,00,000
Death Benefit
In the unfortunate event of the policyholder's death during the policy term, the death benefit is typically the sum assured plus any bonuses accrued up to that point.
If Arjun Patel passes away after 10 years, the death benefit would be:
Death Benefit = Sum Assured + (Annual Bonus × Years Completed)
Death Benefit = 10,00,000 + (50,000 × 10) = ₹15,00,000
Additional Costs
If you include riders such as a Critical Illness Rider, there will be additional costs. These costs are typically added to the base premium. The exact amount will vary based on the rider’s coverage and the insurer’s pricing.
Disclaimer: The calculation provided is for illustrative purposes only. For an accurate premium amount, use an online premium calculator offered by insurance companies or consult a financial advisor who can consider all the specific details and current rates.
Factors Affecting Endowment Policy Premiums
The premium for an endowment policy is determined based on several key factors, which collectively influence the cost you will pay. Here’s how it works.
- Sum Assured: The amount you choose as the sum assured directly impacts the premium. Higher sums assured lead to higher premiums, representing the amount the insurer commits to paying out.
- Age of the Policyholder: Your age when purchasing the policy affects the premium. Generally, younger policyholders pay lower premiums than older individuals due to the lower risk associated with younger ages. This typically ranges from 18 to 65 years.
- Policy Term: The duration of the policy also affects the premium. Longer policy terms may result in higher premiums, as the insurer’s risk extends over a more extended period.
- Payment Frequency: The duration of the policy also affects the premium. Longer policy terms may result in higher premiums, as the insurer’s risk extends over a more extended period.
- Health and Lifestyle: Your health status and lifestyle habits, such as smoking or drinking, impact the premium. Those with riskier lifestyles or pre-existing health conditions may face higher premiums.
- Gender: Gender can influence premiums due to differences in life expectancy and health risk factors. Generally, women may pay lower premiums than men, as they often have a longer life expectancy.
- Bonuses and Add-ons: The presence of bonuses and optional riders (like critical illness cover) can affect the premium. Participating policies that include bonuses might have higher premiums, while add-ons increase the cost based on additional coverage.
- Administrative Costs: A portion of the premium is allocated for administrative expenses. The remaining amount is invested, and the returns on these investments can contribute to bonuses over time.
Things to Consider When Buying an Endowment Plan
1. Plan Early for Maximum Benefits
Buying an insurance policy at a younger age typically results in lower premiums. It allows for a longer tenure, enabling you to build a substantial corpus when the policy matures.2. Understand Your Financial Needs
Assess your life stage, income, family’s financial needs, premium-paying capacity, and risk tolerance. This will help you select a plan for your current and future financial goals.3. Evaluate Premium Payment Options
Choose a premium payment frequency that suits your financial situation - whether it's regular payments for salaried individuals or a single lump sum payment for business owners. Options for monthly, quarterly, or annual payments should also be considered.4. Review Bonuses and Guaranteed Additions
While bonuses depend on the insurance company's performance and aren't guaranteed, some policies offer guaranteed additions to your policy each year, provided premiums are paid on time. Understanding these can help you gauge the potential growth of your policy.5. Check the Insurance Provider's Reputation
Investigate your insurer’s Claim Settlement Ratio (CSR), as a higher CSR indicates a greater likelihood of settling your claims. Also, look for a company with a straightforward buying and claims process, minimizing paperwork and offering quick, hassle-free service.6. Consider Policy Riders
Riders offer additional coverage for specific needs, such as critical illness or accidental death. Evaluate whether any riders align with your personal circumstances and add them to your policy if needed.7. Understand the Surrender Value
The surrender value is the amount you receive if you terminate the policy before maturity. Knowing the terms and conditions can help you avoid any financial loss if you need to surrender the policy.8. Check for Loan Facilities
Some endowment plans offer the option to take a loan against your policy. This feature can be helpful in times of financial need, providing a safety net without compromising your policy benefits.What are the Riders Available for Endowment Plans?
Riders are optional add-ons to your base plan that, for an additional premium, offer extra coverage under various scenarios. Here are some of the significant riders available in endowment plans.
What is Cash Value in Endowment Policy?
How Does Cash Value Grow Over Time?
The growth of cash value in an endowment policy is driven by the investments made by the insurance company. These investments can include a mix of stocks, bonds, and other assets. The growth rate of your cash value depends on the performance of these investments, which can fluctuate with market conditions. Many policies also provide a guaranteed minimum interest rate to ensure steady growth.
The longer you hold the policy, the more time the cash value has to grow. However, it's essential to consider that various factors, such as investment performance or early policy surrender, can impact this growth. Thus, it's essential to carefully evaluate these aspects when choosing an endowment life insurance policy.
Overall, the cash value of an endowment policy can provide a valuable savings component, growing over time and contributing to your long-term financial planning.
Difference Between Endowment Plan And Term Plan
While endowment plans offer a combination of life insurance and savings, comparing them to term plans helps clarify which option better suits your financial goals and insurance needs.
Tax Benefits of Endowment Plans
Section 80C: Premium Payments
- Deduction Limit: Premiums paid for endowment plans qualify for a tax deduction under Section 80C, up to a maximum limit of ₹1.5 lakh per financial year.
- Eligibility: To qualify for the deduction, the premium paid should not exceed 10% of the sum assured for policies issued on or after April 1, 2012. For policies issued before this date, the premium should not exceed 20% of the sum assured.
- Applicability: This deduction is available to individuals and Hindu Undivided Families (HUFs).
Section 80D: Health Riders
- Deduction for Health Riders: Premiums paid for health-related riders, such as critical illness or accidental death benefit riders, are eligible for a tax deduction under Section 80D.
- Deduction Limit: The deduction limit under Section 80D is up to ₹25,000 for individuals below 60 years and ₹50,000 for senior citizens. This is in addition to the limit under Section 80C.
Section 10(10D): Maturity Benefits
- Tax Exemption: The maturity benefit, including the sum assured and bonuses, is fully exempt from tax under Section 10(10D).
- Conditions: The tax exemption is applicable if the premium paid does not exceed 10% of the sum assured for policies issued on or after April 1, 2012. For policies issued before this date, the premium should not exceed 20% of the sum assured.
- TDS: If the policy does not meet these criteria, a 5% tax deduction at source (TDS) may apply on the payout if it exceeds ₹1 lakh in a financial year.
Limitations of an Endowment Policy
1. Lower Returns Compared to Market-Linked Investments
Endowment plans typically offer guaranteed returns, which are generally lower than those of market-linked investment options like mutual funds or stocks. If your goal is to maximize wealth creation, the conservative nature of endowment plans might not meet your expectations.2. Higher Premium Costs
The premiums for endowment plans are usually higher than pure life insurance policies like term plans. This is because endowment plans combine insurance coverage with a savings component. For individuals seeking only life coverage, this additional cost may not be justified.3. Limited Flexibility
Endowment plans often have rigid structures, with fixed premium payment schedules and fixed policy terms. If your financial situation changes, such as a need to reduce premiums or adjust the policy term, you may find the lack of flexibility challenging.4. Penalties on Early Surrender
If you decide to surrender the policy before its maturity, the surrender value may be significantly lower than the premiums paid. This can result in a substantial financial loss, making it crucial to commit only if you're certain you can maintain the policy for the entire term.5. Long-Term Commitment
Endowment plans are long-term contracts, typically spanning 10 to 30 years. If you’re unsure about committing to such a long duration, this could be a drawback. Missing premiums or discontinuing the policy prematurely could lead to loss of coverage and lower-than-expected returns.6. Impact of Inflation
While endowment plans offer guaranteed returns, the purchasing power of these returns may be eroded by inflation over time. The fixed returns may not keep pace with inflation, potentially reducing the actual value of your savings.7. Complexity in Understanding
Endowment plans can be complex, with various terms and conditions, including bonuses, surrender values, and loan facilities. Understanding the full scope of the policy may require careful reading of the fine print and professional advice, which could be a barrier for some.
Endowment plans provide a thoughtful blend of financial protection and growth designed to help you achieve your long-term goals while securing your family's future. By understanding the features, benefits, types, and limitations, you can make an informed decision about whether an endowment plan aligns with your financial aspirations. Consider how this plan fits into your overall financial strategy and explore its potential to offer both security and savings.
FAQs about Endowment Plan
What are the tax benefits of endowment plans?
What are the additional bonuses with endowment plans?
The additional bonuses on Endowment Plans are offered as a certain percentage of the sum assured. These are majorly of two types:
- Guaranteed Yearly Additions
- Guaranteed Loyalty Additions
How many times can I change the nominee in my endowment plan?
The nominee is the person eligible to receive the Death Benefit in case the policyholder dies. They are usually the close ones and the ones directly affected by the policyholder's death.
It is a crucial decision to select your nominee and hence should be taken with a lot of thought.
What are the common exclusions under endowment plans?
Any claim originating from any of the below-mentioned situations comes under exclusions and is declined by the insurance company:
- Participation in any unlawful activity, including riots or civil disturbances.
- Participation in high-risk sports and adventurous activities.
- Being under the influence of drugs or alcohol.
- Self-harm or injury or an attempt to do so.
What is an endowment plan?
What is the endowment benefit?
Is it good to invest in an endowment plan?
What happens if I stop paying premiums?
Is the maturity amount guaranteed in an endowment life insurance policy?
What is an example of an endowment policy?
How does an endowment policy work?
What is the difference between ULIP and an endowment plan?
What is the age limit for an endowment policy?
Are endowment plans taxable?
Can I cash in my endowment policy?
What are the risks of an endowment?
How much income is needed for an endowment?
When should one start an endowment?
What is a marriage endowment plan?
What is a pure endowment policy?
What is a limited payment endowment plan?
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What is a 10 year endowment savings plan?
What is a guaranteed endowment plan?
What is a with profits endowment policy?
What is an education endowment plan?
What is a limited endowment plan?
What is a joint life endowment plan?
What is endowment mortgage insurance?
What is a retirement endowment plan?
What is an endowment assurance policy?
What is a double endowment policy?
What is a participating endowment policy?
What is a non-participating endowment plan?
Can an endowment life insurance policy in India be surrendered before maturity?
What are the disadvantages of an endowment policy?
What are the benefits of a traditional endowment plan?
How does the critical illness cover benefit the policyholder?
What is the main difference between an endowment plan and a term plan?
What happens when an endowment policy matures?
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Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
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