Endowment Policy
The concept of life insurance is simple. The endowment policy provides a lump sum payout to the policyholder’s family after his/her death…
Cost
effective
Low
brokerage
Survival
benefits
Sufficient
coverage
What is an Endowment Policy?
The concept of life insurance is simple. Life insurance provides a lump sum payout to the policyholder’s family after his/her death. An Endowment plan works the same way, except it provides a lump sum payout when the policyholder survives until the end of a specified endowment policy term or survival term.
Payouts’ clause differs with different policies – some pay when diagnosed with a critical illness or other life-altering events. Policy buyers must read and understand the complete terms and clauses regarding payouts before purchasing the policy.
Types of Endowment Plan
There are three major types of Endowment policies available at present.
Unit Linked Endowment Plan
Under Unit Linked Endowment Plan the insurance premiums are directed through multiple units held under a specific investment fund that the policyholders choose.
Full Endowment
With this plan, the basic sum assured will be provided to the policyholder. However, the final payout is significantly higher based on the bonus accrued. It varies from company to company.
Low-Cost Endowment
This type of plan allows the policyholder to accumulate funds which have to be paid after a specified period.
How do Endowment Policies work?
Endowment Policies are considered an extension of insurance policies. Apart from the insurance part, it also acts as a long-term investment option. Endowment policies cultivate the habit of saving for building a long-term financial corpus. Once the policy has matured, the policyholders will receive a lump sum payout from the insurance company along with the bonus if they have survived the policy term. The policyholder can use such funds for various purposes like building a house, marriage expenses, or even as a retirement corpus.
Who Should Buy an Endowment policy?
The decision to buy an endowment policy entirely depends on your financial goals. You should clearly define your financial objectives, insurance goals, and risk appetite before choosing an endowment plan.
For example, suppose you are a young individual who requires life insurance cover while also looking for an investment scheme with tax benefits. In that case, you can either opt for a combination of two instruments (life insurance policy and investment scheme) or choose an endowment policy that offers dual benefits of insurance and investment.
If you are not opposed to risk-taking, you may very well purchase an equity mutual fund, which is dependent on capital markets and has a potential for a higher return. Endowment policies are an ideal investment tool for those who are averse to risk as it combines the best of insurance and investment.
An endowment policy is less risky than a mutual fund. At the same time, it also has ULIP options that invest in various equity and debt schemes. Aside from providing life insurance coverage, endowment policies also offer a lump sum payout to the policyholder on policy maturity, if the policyholder has survived the endowment term. Moreover, it is an excellent tax-saving instrument, as well. All said, it is always wise to consider your risk appetite before making any major financial decision.
Features of Endowment Policies
- The sum assured is available upon on policy’s maturity or death during the policy period
- Bonus for the entire term is payable upon maturity or death whichever is earlier
- The policyholder can pay the premium either as a one-term single premium in a year or through multiple installments
- Endowment policies are available in two forms – with profit and without profit
Benefits of Endowment Policies
- An endowment serves two purposes, it acts as an insurance policy and also an extended investment plan with good returns
- Payouts are given as a lump sum upon policy maturity or death, whichever is earlier
- Endowment policies provide tax relief
It is considered a safe investment, and returns from this policy are on par with returns from mutual funds - Most companies offering endowment policies allow the coverage to be expanded beyond the maturity age, at times till the insurer reaches 100 years of age.
- Policyholders can enhance their coverage with additional riders for critical illness, disabilities, etc