Endowment Policy

What is an Endowment Plan?

An endowment plan is a type of life insurance policy that combines elements of savings and protection. It offers a dual benefit by providing a predetermined sum assured in case of the policyholder's unfortunate demise during the policy term, and a maturity benefit if the policyholder survives till the end of the policy term. 

With an endowment policy, the policyholder pays regular premiums over a predetermined period, usually 10, 15, 20, or 25 years. The premiums paid by the policyholder are divided into two parts: a portion is used to provide life insurance coverage, and the remaining portion is invested by the insurance company.

An Endowment Policy can serve as a valuable tool for building a financial safety net to support both short-term and long-term financial goals throughout life. Endowment plans are designed to help individuals meet their long-term financial goals while providing a safety net for their families.

Best Endowment Plans in India 2024

Types of Endowment Policy

1. Unit Linked Endowment Plan

   This is a fixed-term saving plan which also provides the benefit of life coverage. Under this plan option the premium paid by the insured is bifurcated into different units held under a particular investment fund, as chosen by the insured person. The return on investment entirely depends on the market performance of the fund. This plan option is best suitable for individuals who have a high-risk appetite and who want to gain high return on investment.

2. Full/With Profit Endowment 

   Under this plan option, the basic sum assured amount equal to the death benefit is provided to the insured person. This amount is guaranteed from the starting of the policy. Moreover, the final payout paid to the insured is comparatively higher, as it includes the total sum assured amount plus additional bonus (if any).

3. Low-Cost Endowment

   This type of endowment plans are specifically designed to help the insured to accumulate a fund for the future, which have to be paid after a particular time period. Generally, low-cost endowment plans are used for the repayment of mortgage, loans, etc.  In case of demise of the insured during the policy term, the target amount is paid as the minimum sum assured to the beneficiary of the policy.

4. Non-profit Endowment

   In non-profit traditional endowment policy, a sum assured amount is paid to the policyholder as maturity benefit or to the beneficiary of the policy as a death benefit.

5. Guaranteed Policy

   Endowment insurance policies guarantee that a sum of money will be given to you or your beneficiaries whether you live until the insurance policy matures or you die early. The face value of an endowment policy will be given to the policyholder on the "maturity date" or to the beneficiary of the life insurance policy in the event the insured dies. The bonuses under the policy are not guaranteed. Thus with endowment policy you get the dual advantage of guaranteed policy benefits and non guaranteed bonues.

Comparison Between

Fixed Deposits, Guaranteed Return Plans & Debt Mutual Fund

Guaranteed Return Plans, Fixed Deposits &
Debt Mutual Fund

Guaranteed Return Plans

Returns Before Tax

7.5% ^(TAX-FREE)

Returns After Tax

7.5%

Guaranteed Returns

Yes

Life Cover

Yes

Tax on Profit

Tax Free*

Risk

No Risk

Still Better than FD’s and Debt Mutual Fund

Fixed Deposits

Returns Before Tax

7% ^(TAXABLE)

Returns After Tax

4.8%

Guaranteed Returns

Yes

Life Cover

No

Tax on Profit

Taxable

Risk

Low Risk

Debt Mutual Fund

Returns Before Tax

8% ^(TAXABLE)

Returns After Tax

5.5%

Guaranteed Returns

No

Life Cover

No

Tax on Profit

Taxable

Risk

High Risk

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*For annual premium upto ₹5 Lacs

Benefits of Endowment Policy

Endowment policies give you the following benefits:

1. Additional Bonus on Endowment Policy

   There are various types of bonuses declared by an insurance company. Bonus is an extra amount of money additional to the proceeds, which is given to a policyholder by an insurer. Only holders of with-profits policy are entitled to a share in these profits and the payment of this bonus is conditional on the life insurer having surplus funds after claims, costs, and expenses have been paid in a particular year.

   The bonuses are classified as:

   • Reversionary Bonus: Additional money added to the amount payable on death or maturity of with-profits policy. Once a reversionary bonus has been made it cannot be withdrawn if the policy runs to maturity or to the death of the insured.

   • Terminal Bonuses: A discretional additional amount of money added to payments made on the maturity of an insurance policy or on the death of an insured person.

2. Rider Benefits

   One can purchase the following rider benefits with his/her endowment plan:

   • Accidental Death Rider: Opting for this rider gives policyholders an additional benefit of accidental death with a death benefit. In other words, the nominee gets accidental death benefit in case of accidental death of the policyholder along with the death benefit.

   • Critical Illness Cover: This rider works as a boon when the policyholder is diagnosed with a critical illness such as heart attack, cancer, kidney failure, etc. Taking this rider provides a lump sum amount to the policyholder on detection of any such critical illnesses.

   • Disability: This rider is proved as one of the most useful riders as it provides financial help to the policyholder in case of permanent or partial disability.

   • Hospital Cash Benefit: Under this rider, the policyholder gets a daily allowance in case of hospitalization. With cash benefit, this rider also covers post-hospitalization expenses.

   • Waiver of Premium: With this rider, the policyholder is not liable to pay any premium for his/her endowment plan if he/she suffers from permanent disability or critical illness.

3. Maturity Benefits

   Upon surviving the term of the policy or upon the end of the policy or maturity, the insured receives sum assured plus bonus for the term of the policy. The amount receivable upon maturity is tax-free. This is the maturity benefit under an endowment policy.

Features of Endowment Policies

Salient Features of endowment policy are:

• Death along with Survival benefits: The nominee/beneficiary gets the sum assured along with bonuses, in case of the demise of the insured before the maturity of policy. And, the insured is entitled to get the sum assured if s/he outlives the policy.

• Higher returns: An endowment plan not only provides financial protection to the family and dependents of the policyholder in case of the unforeseen demise of the insured but also helps build a corpus for the future. Whether it is the survival benefit or death benefit, the payout of an endowment plan can be much higher than that of a pure life insurance policy.

• Premium Payment Frequency: The policyholder can make regular, single or limited payments of the premium based on the policy chosen by him/her. One can also choose to pay in frequencies on the yearly, half-yearly, quarterly, or monthly basis.

• Flexibility in Cover: Policyholders can add riders, such as critical illness, total disability, and accidental death, to the plan and increase their life cover. A few plans also offer premium payment waiver in case of permanent disability or critical illness.

• Tax Benefits: The policyholder gets tax exemption on both the premium payments and maturity or final death payouts, under Section 80C and Section 10(10D), respectively.

• Low Risk: Endowment policies are safer as compared to other investment plans like mutual funds or ULIPs, as the amount is not invested directly in equity funds or the stock market.

Who should buy the Endowment Policy?

• Experts recommend endowment plans for individuals with regular earnings who need a lump sum after a certain period

• Endowment plans offer a disciplined route to build a corpus for dependents in case of financial contingencies

• Small businesspersons, salaried individuals, lawyers, and doctors should consider buying endowment plans for long-term financial goals

• Endowment plans are ideal for risk-averse individuals who don't mind settling for fewer returns and are not super-rich

Why should an Individual buy an Endowment Policy?

• Endowment policies provide a disciplined means of saving money for the future needs.

• An additional advantage is life risk coverage for the family and dependents of the policyholder.

• Returns may be lesser, but they are risk-free for a certain sum assured.

• Tax benefits can be availed subject to certain conditions.

• Risk-averse investors prefer endowment plans.

• It offers a life cover to the insured in case of an unforeseen event.

• It offers the maturity amount to the policyholder if she/he survives the policy term.

What to see when buying an Endowment Policy?

One should see the following things before purchasing an endowment plan:

• Begin early planning: Making investments at an early age offers a long horizon to invest. This aids the insured to build a vast corpus over time. This facilitates a disciplined saving and ensures better returns because of its power of compounding.

• Review the flexibility option: There are various flexible options. If the insured is a salaried individual, s/he may choose a regular payment endowment policy. There are single payment options for individuals with irregular income.

• Know different types of Endowment Policies: If an individual wants to invest in endowment plans, it is necessary for him/her to make frequent premium payments. A portion of the premium is used to buy a life insurance plan. The remaining sum is invested on either a non-profit basis or profit basis type of plan.

• Select a plan that offers riders: A lot of insurance companies offer additional benefits like education endowment, double endowment policy, or marriage endowment policy. One must keep such riders in mind while buying one for them. Some insurers also provide additional riders towards surgical assistance or critical illness.

• Bonuses: The bonuses are provided by the insurance companies as per the performance of the company. An insurance provider, who makes profits from his/her investments, distributes some part of the profit at the end of every policy year.

• Non-Guaranteed and Guaranteed Returns: Apart from low-risk insurance policies and dual benefits of savings and death cover, many of the endowment plans as well provide a combination of non-guaranteed and guaranteed returns.

How does an Endowment Policy work?

In case the policyholder dies before the maturity of the plan, the nominated beneficiary gets only the fixed amount termed as Sum Assured. As the insured live longer s/he gets bonuses, and if he/she outlives the term of the policy, s/he gets the maturity amount, i.e. Sum Assured + Bonuses.

Claim Process of Endowment Plan

The beneficiary should inform the insured about the death soon after the death of the policyholder. As soon as the insurer gets to know about the loss, a claim form is forwarded to the nominee.

Fill the Claim Form:

• To claim the death benefit, the beneficiary/nominee of the policyholder/assignee or legal heirs must sign the claim form.

• The last treating doctor who checked the insured should provide the loss statement.

• The authorities of the hospital where the insured received treatment should provide the certificate.

• A witness statement and death certificate from someone present during cremation are required.

• If the insurance company requires a discharge voucher, it should be filled out and provided.

For effective and fast sanction of the death benefit, an additional form as mentioned below should be provided:

• Post Mortem’s certified copy, police investigation report, and First Information Report – in the situation of the death of the policyholder was unnatural.

• Employer’s e-certificate, if the insured was working in an organization.

Endowment Vs. Money Back Policy

The common difference between endowment and money back policies are:

Endowment Policy Vs ULIPs

The common difference between endowment and ULIP plans are:

Documents Required for Endowment Plan

Mentioned below is the list of documents required for applying an endowment plan:

• Age proof

• Photograph

• Completely filled proposal/ application form

• Residence or address proof

What Happens When an Endowment Policy Matures?

When the policyholder outlives the policy term and the policy matures, he/she gets a lump sum amount as maturity bonus.

Are Endowment Plans Tax-Free?

There are two types of tax benefits for endowment plans that policyholders, nominees, and potential buyers should know.

• Premium Deduction: Policyholders can claim a deduction on the premiums paid under Section 80C of the Income Tax Act 1961. The deduction is limited to a maximum of Rs 1.5 lakhs per year.

• Benefits Exemption: Under Section 10(10D) of the Income Tax Act 1961, tax exemption can be claimed on the benefits received from the endowment plan. This includes both the maturity benefit and the death benefit. However, specific conditions must be satisfied to qualify for this exemption.