An endowment policy is a life insurance policy that incorporates the concepts of insurance and savings. As two benefits are coupled within a single plan, there are two distinct circumstances in which each will be effective.
It provides maturation and death benefits depending on the applicable circumstances. In addition to helping you meet your long-term financial objectives, it is therefore regarded as a sound financial investment that provides life insurance coverage.
The primary advantage of an endowment policy is that it functions as a savings plan and provides the policyholder with a lump-sum payout and guaranteed incentive at the end of the policy term.
Therefore, an endowment plan must be purchased by those who intend to:
- Secure the financial future of their family and dependents.
- Create a financial safety net to meet the long-term investment goals or obligations.
- Focus on attaining specific life objectives.
It is important to note that endowment policies differ significantly from other insurance policies, as pure insurance policies do not permit the withdrawal of sums paid to the insurer if the insured survives the policy term.
These policies also enable participation in bonuses of the insurance company if declared during the policy term.
Features of Endowment Policy
The following are notable characteristics of an endowment policy:
Death and Maturity Benefits
A policyholder will receive a maturity benefit if they outlive the policy term. In the event of the policyholder’s untimely death, the nominee will receive the death benefit and any incentives (if applicable).
Modular Premium Frequency
The policyholder may pay monthly, quarterly, semi-annual, or annual premiums.
Greater Returns
Endowment policies offer the policyholder a savings plan in addition to insurance benefits. Consequently, the accumulation of wealth is typically more significant than that of a single life insurance policy.
They Serve a Dual Function
In addition to serving as an insurance policy, an endowment policy also functions as a long-term investment product.
You Get Loan Advantages
Endowment policies can be used as collateral for loans. Once your policy has a surrender value, a policy loan is available. These loans have relatively reduced interest rates than others.
Options for Flexible Premium Payments
The policyholder can pay the premium by the selected insurance. Under an endowment plan, monthly, quarterly, semi-annual, and annual payments can be made.
You Receive Extra Bonuses
Various endowment plans provide the insured with additional incentives. The bonus is the additional quantity of money that is added to the policyholder’s payout by the insurer.
Rider Choices
There are available rider options that can be added to your primary plan to enhance its benefits. The benefits of supplements such as critical illness, accidental death, and total and permanent disability are substantial. In addition, some plans offer premium exemptions for riders covering permanent disability and critical illness.
Low Danger
Endowment policies are more secure than mutual funds and ULIPs because they do not invest directly in market-related instruments.
Tax Advantages
Both premium payments and maturity benefits are eligible for tax breaks for the policyholder.
Types of Endowment Policy
Now that you understand how an endowment policy operates and its features, you should be familiar with its various varieties. Five distinct categories of endowment policies exist:
1. Full Profit Plan
With a complete profit plan, the insured receives a predetermined, guaranteed quantity assured from the policy’s inception. The insured may also receive a gratuity in addition to the maturity value. The nominee would receive the same amount in the event of the insured’s untimely death.
2. Guaranteed Coverage
As the name implies, a guaranteed policy guarantees the policyholder a maturity benefit. Therefore, the policyholder will obtain the maturity benefit if they outlive the term. In the event of the insured’s untimely demise, the beneficiary will receive the sum assured.
3. Economic Plan
A low-cost endowment plan enables the policyholder to amass wealth over a specified time frame. This is an exclusive lock-in period, after which your policy will mature. The beneficiary will receive the sum assured if the policyholder passes away before the lock-in period.
4. Unit-Linked Endowment Scheme
In this endowment plan, your premium is invested in two parts. One part goes towards the insurance plan, and another is invested towards various investment instruments the policyholder chooses when entering the plan. This plan is riskier than a guaranteed policy because it involves market-related investments.
5. Non-profit Strategy
This plan does not provide compensation; therefore, it is known as a “non-profit” plan. The insured will only receive the sum assured at maturity, or a mortality benefit will be paid to the beneficiary.
How Does Endowment Policy Work?
When you enrol in endowment life insurance, you determine the magnitude of your death benefit and the duration of your coverage. After your policy, you also decide how much you want to receive as an endowment payment.
You will then pay premiums to maintain coverage. These premiums will cover a portion of your insurance coverage.
The insurer will invest the remainder to generate a guaranteed return for future endowment payments. At the end of the term, paying premiums is no longer required, but also forfeiting your life insurance coverage.
While your money grows in the endowment life insurance policy, you owe no income tax. When you receive the final reimbursement, you must pay income tax on any amount exceeding the premiums you paid.
Criteria for Who Can Apply for Endowment Policy
If you want to buy an endowment policy, you should know these things about what makes you eligible:
- You must be at least 18 to have a simple endowment plan. On the other hand, some plans may let you buy coverage as soon as the baby is born.
- You must be at least 60 years old to buy endowment coverage. So, you can put money into this plan to save for retirement.
A policy must be paid off when the owner turns 18 years old. So, if your parents had put money into an investment plan when you were young, it would help you pay for college.
Factors to Consider Before Buying Endowment Policy
There are vital factors to consider when you want to make an endowment policy purchase.
Start Early
Early life investment in an endowment plan is crucial. As a result, the earlier you invest, the higher your long-term returns.
Endowment policies with more than 15 or 20 years of maturity are deemed more profitable because they can rapidly accumulate significant amounts of money.
Select Strategy Wisely
As endowment plans are typically long-term, the premium should always be calculated. Affordable premiums make meeting other external contingencies possible without disrupting your premium payments.
Learn the Details
Utilize the included features to the greatest extent and, if necessary, supplement your policy with additional riders. Choose the type of endowment policy based on your risk tolerance, premium payment capacity, and expected returns.
Returns Provided
Always thoroughly examine the types of returns offered by the policy. An endowment plan provides both guaranteed and non-guaranteed benefits. Non-guaranteed returns, such as bonuses, are transient, whereas guaranteed benefits are disclosed in advance.
Examine Flexibility
The policyholder can choose between solitary, periodic, or a limited number of premium payments. A regular endowment policy is always available to salaried employees.
Claims Payout Ratio
Always examine the claim settlement ratio (CSR) when purchasing a permanent life insurance policy. This parameter ensures that the company has resolved a specified percentage of the total claims received. The higher the CSR, the more likely your claim will get payment.
How Is The Premium Of An Endowment Policy Determined?
All endowment insurance policies are generally designed to provide the option to choose the premium amount. One should be aware that a portion of the premium is invested and provides returns, while the remainder provides life insurance.
The proportion of your premium that goes toward your life insurance depends on the following variables:
Sum Assured: The greater the sum assured coverage or quantity, the greater your premium.
Age: When you’re youthful, you’re more likely to be in good health, and as a result, your premiums will be much lower and more affordable. However, the premium amount increases as the insured’s age increases.
Lifestyle Practices: This is a crucial aspect of insurance. Poor lifestyle choices, such as the use of tobacco and alcohol, increase the risk of disease.
Consequently, the premium is typically increased in such instances. Similarly, preexisting health conditions may also result in a premium increase.
Limitations of Endowment Policy
Endowment policies are both protection and savings plans in one. It also helps insurers save money on taxes. However, you should be aware of some problems with this strategy before you decide anything.
1. The premiums for endowment plans are higher than those for other types of life insurance.
2. The money you put in will give you a modest return. Regarding returns, other market-linked tools tend to do better than endowment plans.
3. When you buy a pension policy, you will only be covered for a specific time. Also, these don’t usually get renewed or changed into something else. If you want protection after it ends, buy another plan or policy.
4. Bonuses are not a given. This option isn’t always available from all insurance companies. Bonuses may be at the end of the financial year, but only if the company makes money.
Conclusion
An endowment program helps you save money by making regular investments over time. This choice for a low-risk policy helps protect your family’s financial future by giving them both investment and insurance benefits. Before you play for an insurance policy, make sure you remember all of the above tips.
