When it comes to securing your financial future and providing for your loved ones, life insurance is an essential consideration. However, with so many different types of policies available, it can be challenging to determine which one is right for you. One option to consider is an endowment life insurance policy, which combines the benefits of insurance coverage with investment opportunities. In this article, we’ll explore what an endowment life insurance policy is, how it works, and what factors to consider when deciding whether it’s the right choice for you.
What is an Endowment Life insurance Policy?
An endowment plan is a two-in-one life insurance policy that combines an insurance cover and a savings plan. By regularly saving over a specific period, policyholders can receive a lump sum amount on maturity, provided they survive the policy term. If the policyholder passes away, the sum assured plus any bonus will be paid to the nominee. This plan is also beneficial for securing post-retirement life, funding education, marriage, or buying a house.
Types of Endowment Life insurance Policies
There are three main types of endowment policies:
Traditional Endowment Policy: This is a simple and straightforward endowment policy that provides a guaranteed sum assured along with a bonus, if any, on maturity or death. The premiums for traditional endowment policies are usually higher compared to other types of policies as they provide a guaranteed return. Example: HDFC Life Sanchay Plus.
Unit Linked Endowment Policy (ULIP): This type of endowment policy allows the policyholder to invest their premiums in a mix of debt and equity funds. The returns are not guaranteed, but the policyholder has the potential to earn higher returns compared to traditional endowment policies. Example: ICICI Pru Elite Life Super.
Money-Back Endowment Policy: This type of endowment policy provides periodic payouts during the policy term as a percentage of the sum assured, while the balance amount is paid on maturity. In the event of the policyholder’s death, the full sum assured is paid to the nominee. Example: Max Life Monthly Income Advantage Plan.
Features of Endowment policy
Dual benefit: Endowment policies offer both life insurance coverage and savings benefits.
Flexible payment options: Policyholders can choose from a range of payment options, such as single premium or regular premium payments.
Guaranteed returns: Endowment policies provide guaranteed returns, such as guaranteed additions, which are fixed and paid out upon death or maturity.
Non-guaranteed returns: Policyholders can also earn non-guaranteed returns, such as bonuses, which are variable and depend on the performance of the insurer’s investments.
Maturity benefit: If the policyholder survives until the end of the policy term, they receive a lump sum payout, which includes both the sum assured and bonuses (if applicable).
Tax benefits: Endowment policies offer tax benefits under Section 80C of the Income Tax Act, making them a popular choice for tax planning.
How Does Endowment Life Insurance Work?
Endowment life insurance allows the policyholder to collect a payout at the end of the contract period, while also providing death benefits to beneficiaries if the insured person dies before the contract ends.
Premiums are paid for a set term, which can range from five years to 30 years, and part of the premiums goes towards funding the death benefit while the rest is invested.
The policy’s benefit amount and contract term can determine the premiums paid.
If the policyholder outlives the term, they receive the face value of the policy as a lump sum or instalments. If the policyholder dies before the contract ends, the beneficiaries receive the payout.
Endowment policy Vs. Term Plan
Ok!! Now lets understand this through a small example
Let’s say Rohit, a 30-year-old individual, wants to purchase a life insurance policy with a coverage amount of Rs. 1,00,00,000. He can choose between an endowment policy and a term plan.
An endowment policy provides both insurance coverage and investment benefits, while a term plan provides pure insurance coverage for a specific period. A term insurance plan provides much higher coverage at lower premium whereas the endowment policy has the much lower protection part i.e. Sum Assured against life insurance. This is the biggest downside of the endowment plans.
The choice between the two policies depends on individual financial goals and risk tolerance. If someone wants both insurance coverage and investment benefits, an endowment policy may be suitable. On the other hand, if someone wants pure insurance coverage at an affordable premium, a term plan may be a better choice.
Who should buy the Endowment Policy?
People with steady income who need a large sum of money after a specific time frame should consider purchasing endowment plans. Endowment plans are a structured approach to building a savings fund that can be used to support the dependents of the policyholder during unexpected financial emergencies.
Endowment plans are an ideal option for small business owners, salaried employees, and professionals like lawyers and doctors who aim to achieve their long-term financial objectives. Risk-averse individuals who prioritise stability over higher returns can also benefit from endowment plans.
They are particularly well-suited for the general public rather than the super-rich. However, if someone is solely interested in life insurance coverage and not savings, then a term life insurance policy is a better option. A term plan is less expensive and provides greater coverage at a lower premium than endowment policies.
Factors to consider before choosing an Endowment Life insurance Policy
- Plan Ahead for Better Results
Investing early is a smart move because it gives your money more time to grow. This can help you build a healthy financial foundation and develop good saving habits. By starting early, you’ll have a longer period to accumulate wealth and reach your financial goals.
- Benefits Beyond the Basics
Don’t forget to take advantage of insurance policies that offer riders as an included feature. These riders provide extra benefits such as education endowment, double endowment policy, or marriage endowment policy, which can be extremely valuable.
- Review flexibility option
Insurance companies that offer endowment plans provide flexibility for customers to choose the payment option that best fits their financial situation. For example, salaried individuals may prefer a regular endowment policy, while those with irregular income may choose a single payment option or limited premium payment option. This allows customers to customise their policy to their specific needs and budget.
- Guaranteed and Non-Guaranteed returns
In addition to providing low-risk insurance and the dual benefit of death coverage and savings, many policies offer a mix of guaranteed and non-guaranteed returns. Guaranteed returns, such as guaranteed additions, remain fixed and are paid out upon death or maturity. Non-guaranteed returns, such as bonuses, are variable and depend on the performance of investments.
- Guaranteed Addition/Bonus
Insurance companies declare bonuses based on their investment performance. If the company earns profits from investments, a portion of those profits is distributed to policyholders at the end of each financial year. The company’s profitability is also influenced by the value of its assets and liabilities.
To sum it up, an endowment life insurance policy is a type of insurance policy that offers a combination of insurance coverage and investment options. It can be a suitable option for those who want to secure their loved ones’ financial future while also investing their money. By learning more about endowment life insurance policies, you can make an informed decision about whether it is the right option for you. Remember to consider the policy’s terms and conditions, including the premium amount, payout options, and investment returns, before making a decision. With careful consideration, you can find an endowment life insurance policy that fits your needs and goals, and ultimately helps you achieve financial security.