Endowment Policy

Table of Content

1. What is an Endowment Policy

2. Features of Endowment Policy

3. How Does an Endowment Policy Work?

4. What are the types of endowment plans?

5. What are the benefits of an endowment policy?

6. What should you look for before purchasing an endowment policy?

7. Why should a person purchase an Endowment Policy?

8. Who should consider buying an endowment plan?

9.What Are the Documents Required to buy Endowment policy?

10. Difference Between an Endowment and a Money-Back Policy

11.What Happens When an Endowment Policy Matures?

12.Are Endowment Plans Tax-Free?

13. Summary

14. Frequently Asked Questions (FAQs) on Endowment Policy

What is an Endowment Policy

An endowment plan is a type of life insurance that blends protection and savings into one structured solution. 

The endowment plan meaning becomes clear when you look at its two essential components: it endows life cover, which ensures the nominee receives a guaranteed amount if the policyholder passes away. And maturity payout, which is a sum assured as well as a bonus when the policyholder survives the term of the policy. 

This combination helps with answering queries, such as what an endowment plan is, showing how an endowment life insurance policy supports security, disciplined saving and wealth-building over time.

Survival Scenario

If Mr. Suriya purchases a 15-year plan for his child’s higher education and completes the full term, he gets ₹10 lakh plus a ₹2 lakh bonus. This shows how an insurance endowment plan encourages savings and assists in fulfilling goals having long term investment time frames.

Death Scenario

If Mr. Suriya expires in the 8th year of the term of the policy, then his family members get the sum assured equalling ₹10 lakh. This highlights the protection feature of an endowment policy. This further ensures the loved and dear ones get a reliable financial cushion in the course of tough times.

Features of Endowment Policy

An endowment policy clubs life insurance protection with structured payouts. This blend offers a balanced approach to security as well as savings. This section will walk you through the core characteristics that assist in shaping how the policy functions, covering protection, payout structures, risk profile, as well as built-in flexibilities, before moving into detailed explanations.

1. Sum Assured on Death

The sum assured is the fixed amount. This amount is paid to the nominee in case the policyholder passes away in the course of the term of the policy. It acts as a base for the policy's life cover, as well as ensuring dependable financial security for the family members. This amount is part of the structure of the policy insurance and stands apart from maturity payouts/bonuses.

2. Maturity Payout

The maturity payout is the amount the policyholder gets by the time the policy term ends. It can involve reversionary bonuses/terminal bonuses declared by the insurer over the years. This payout is a structural element of the policy as well as functions independently of the death benefit. 

It defines how the plan delivers a planned sum at the time of maturity. This supports the policyholder’s financial priorities over the long-term period.

3. Flexible Premium Payment Options

The policy endows great flexibility in selecting premium payment frequency, i.e., yearly, half-yearly, quarterly or monthly. This assists in lining payments with the policyholder’s income flow as well as budgeting style. It is a design feature that shapes how the policy operates, which focuses on convenience and financial fit rather than the final benefits.

4. Policy Term Options

Endowment policies come with distinct term lengths, i.e., 10, 15, or 20 years, allowing individuals to select a duration that matches their life goals. This structural element influences how long premiums are paid, when maturity occurs and how long protection stays active. It forms part of the policy’s framework instead of a direct outcome/reward.

5. Low-Risk Investment

Endowment policies follow a low-risk investment approach that prioritises capital protection and predictable returns. Their stable structure shields policyholders from market volatility, which ensures steady outcomes throughout the term of the policy. 

This low-risk profile is a vital feature of how the policy is built and must be viewed separately from the benefits as well as payouts it generates.

How Does an Endowment Policy Work?

An endowment policy functions by blending perfectly insurance cover with systematic savings. Here is a breakdown of how the process functions, right from policy selection to maturity/claim.

Step 1: Choose Your Policy and Coverage Amount

You begin by selecting a sum assured and a policy term depending on your financial goal, i.e., a retirement plan or your child’s higher education.

Step 2: Decide the Premium Payment Frequency

Endowment plans offer flexibility in how you pay premiums. You select whichever fits your budget well.

• Monthly: Best for salaried individuals who prefer budgeted and steady outflows.

• Quarterly/Half-Yearly/Annually: Best for business owners/freelancers having variable income. 

Most insurers offer auto-debit/ECS options. This enables you to never miss out on a premium. Timely payments are essential to keep the policy in active form and eligible for bonuses.

Step 3: Accumulate Wealth Over the Policy Term

Throughout the policy term, your regular premiums assist in building your savings corpus while even providing you with a life cover. The insurer invests these funds, and your policy even accumulates bonuses, which enhance the final payout. This creates a disciplined, "forced savings" habit.

Step 4: Payout Phase

By the end of the policy term, one of the two events takes place:

• Maturity Benefit: In the case you survive the term of the policy, you get the sum assured (full amount) as well as accumulated bonuses.

• Death Benefit: In the case of death in the course of the policy term, your nominee will get the sum assured to ensure financial security.

Step 5: Tax Benefits and Financial Planning

Endowment policies offer tax benefits. This enhances their financial appeal:

• Premiums paid are eligible for tax deductions of up to ₹1.5 lakh as per Section 80C of the Income Tax Act, 1961.

• Payouts (maturity/death) are usually exempt as per Section 10(10D) of the Income Tax Act, 1961, provided premiums are within specified limits (i.e., not surpassing 10% of the sum assured for policies issued post April 1, 2012).

This makes endowment plans not just a financial protection instrument but even a tax-efficient investment that supports responsible financial planning.

What are the types of endowment plans?

Investing in an endowment policy is ideal for people who are looking for an alternative source of income. There are various types of endowment insurance plans available. Based on your personal financial goal and premium payability, you can choose the right plan. 

1. Unit Linked Endowment Plan (ULEP)

This is a hybrid policy that combines life insurance with market-linked investment; it functions similarly to a ULIP (Unit Linked Insurance Plan).

How it Works: A portion of your premium secures your life cover. However, the rest of the amount is invested in market-associated funds you select (i.e., equity, debt or a mix).

Returns: The final payout is associated with the performance of such funds. This offers the potential for higher returns and even carries market risk.

Ideal for: Investors having a moderate to high-risk appetite level who want to blend wealth creation potential with the security of a life cover.

2. Endowment with Full Profits

Also called participating endowment plans, such plans endow guaranteed benefits at the time of maturity.

How it Works: It provides a guaranteed sum assured at the time of maturity or death. This guaranteed amount is enhanced by non-guaranteed bonuses (i.e., reversionary and terminal bonuses) declared by the insurer depending on its performance.

Returns: You receive a stable, predictable base return with the potential for additional earnings.

Ideal for: Individuals looking for reliable, low-risk growth with an upside potential from bonuses.

3. Low-Cost Endowment

This type of endowment plan comes at a lower premium, making it accessible for individuals with long-term financial goals, such as children's education, plans of taking loans, securing a post-retirement fund and children's marriage. 

How it Works: The fundamental goal is to accumulate a target fund equal to a future liability. The focus is on capital accumulation at a minimal cost instead of high growth, which makes the premiums affordable.

Returns: The returns are modest and tailored to be just sufficient to cover up the targeted amount.

Ideal for: Individuals who require a disciplined savings financial tool to pay off a long-term debt, i.e., a home loan, or to finance a particular life goal affordably.

4. Non-Profit Endowment

In this variant, there are no bonuses or profit-sharing. Instead, the policy offers fixed, guaranteed returns promised at the time of purchase.

How it Works: The maturity benefits, as well as the death benefit, are predetermined. They are stated clearly when you purchase the policy. There is no variability in bonuses. "Non-profit" simply means you don't participate in the insurer's profits.

Returns: The payout is exactly what was promised, offering complete predictability.

Ideal for: Extremely risk-averse individuals who value absolute clarity as well as certainty in their financial planning.

Clarification: “Non-profit” does not mean the plan is charitable. It simply means zero additional earnings beyond the assured benefits.

5. Guaranteed Policy

As the name suggests, in a guaranteed endowment policy, a policyholder gets a fixed sum amount on maturity of the plan or as a death benefit.

How it Works: The policy contractually assures a particular sum of money that the policyholder or nominee will receive. This amount stays unaffected by the insurer’s investment performance or market ups and downs.

Returns: The final return is fixed and secure, providing a powerful sense of security.

Ideal for: Traditional investors who prioritise the safety of their capital and want a firm commitment to the final payout amount.

6. Limited Premium Payment Endowment Policy

This plan offers the convenience of paying premiums for a shorter period while enjoying life cover and benefits for a much longer policy term.

How it Works: You might pay premiums for only 10 or 15 years, but the policy cover continues for 25 or 30 years.

Benefits: It allows you to complete your financial obligations during your peak earning years.

Ideal for: Self-employed professionals, freelancers, or individuals with variable income streams who prefer to front-load their premium payments.  

7. Money Back Endowment Policy

This plan is a combination of savings, insurance, and periodic liquidity.

How it Works: It functions just like any endowment plan. However, it pays out a particular percentage of the sum assured as "survival benefits" at periodic intervals in the course of the term of the policy. The rest of the sum assured, along with accrued bonuses, is paid at the time of maturity.

Benefits: Provides regular cash flow to meet short-term or recurring financial goals.

Ideal for: Individuals who require funds for recurring milestones, i.e., paying a child's annual school fees, loan EMIs or planning yearly vacations.

What are the benefits of an endowment policy?

Endowment policies offer a unique blend of life insurance as well as systematic savings, which makes them one of the most versatile and low-risk financial products for long-term planning. Here are some essential benefits:

1. Life Cover for Family Protection

The life cover of an endowment plan endows a financial safety net to the family members of a policyholder in unforeseen circumstances. Not only does the family receive the predetermined assured sum, but they also have the possibility of bonuses. 

These bonuses are an extra amount on top of the assured sum. However, those who choose an endowment with full profits become eligible for these bonuses.

2. Helps Build Savings

One of the major advantages of endowment policies is that they promote disciplined savings.

Periodic premium payments act like forced savings.

The guaranteed maturity benefit with bonuses assists you in building a sizable corpus.

Unlike market investments, the returns are predictable plus safe, which appeals to conservative investors and a secure savings plan.

3. Flexible Premium Payment Options

Endowment plans provide enough flexibility when it comes to premium payments. Users can choose the frequency of premiums: monthly, quarterly, half-yearly or yearly. It assists in convenient cash flow management. 

4. Loan Option

The policyholders can consider the endowment plan as a liquid financial asset. For example, if a policyholder faces a medical emergency, they can borrow money against the policy. Moreover, a policyholder even has the option to receive the surrender value, which is part of the invested amount, in case they decide to exit the policy before maturity.    

5. Maturity Benefits

When you sign up for an endowment plan, you get a basic guaranteed sum assured amount. At the end of the chosen term, you receive the guaranteed amount along with bonuses such as reversionary and terminal. 

Whereas a reversionary bonus refers to a locked-in bonus that a policyholder receives once declared, a terminal bonus is a sort of discretionary bonus. Its applicability depends on the insurer. 

6. Tax Advantages

There are multiple stages where you get tax advantages with an endowment policy. As per Section 80C of the Income Tax Act, 1961*, when you pay the premium, you get a tax deduction. Then, upon maturity, you get a tax exemption as per Section 10D. This way, reduced tax burden amplifies your overall returns.

What should you look for before purchasing an endowment policy?

Buying an endowment plan is a long-term financial commitment. To make the most out of it, you must examine your life goals as well as the policy’s features carefully. Here is what you must consider before you sign up:

1. Alignment with your Financial Goals

Clearly define your financial goals, both from a long-term investment and a short-term investment perspective, depending on the objective you want to achieve.

When selecting the sum assured, note that you must factor in inflation to make sure that the final payout will have enough value to mitigate your future needs. You can make use of an online savings calculator or a child education planner to plan this out.

2. Flexibility in Premium Payments

Check out the available premium payment terms. Does the plan offer a limited pay option (i.e., where you pay for a shorter duration than the term of the policy) or only a regular pay option? Select a feasible frequency (i.e., monthly, quarterly, half-yearly or annually) that lines up well with your income stream.

3. Available Riders^# for Enhanced Coverage

Go for riders that are beneficial if you are looking to enhance your base insurance policy.

Critical Illness Rider: Endows a lump sum upon diagnosis of any major illness.

Accidental Death Benefit Rider: Offers an additional pay-out in the scenario of accidental death.

Waiver of Premium Rider: Waives future premiums in the scenario that the policyholder is disabled or critically ill.

Note that the riders are available only on the payment of an additional premium.

The Insurer’s Credibility

Your policy is a long-term contract, so the reliability of the insurer is crucial. Before purchasing, always check out two important metrics:

Claim Settlement Ratio (CSR): A ratio of over 95% is usually considered good and shows the insurer's track record of honouring claims. HDFC Life has a claim settlement ratio of 99.68% (financial year 2025)^{^}.

Solvency Ratio: This shows the insurer's financial stability and ability to meet its long-term obligations.

4. Bonus History (for Participating Plans)

For “with-profit” endowment plans, the bonus history of the insurer offers insight into previous performance trends as well as potential additional payouts. Steady bonus declarations over 5–10 years suggest consistency, even though they don’t guarantee future bonuses. 

Reviewing this data helps you estimate maturity values more realistically, making it useful for long-term savers seeking predictable, disciplined growth.

Why should a person purchase an Endowment Policy?

An endowment policy is a strategic financial choice for individuals looking for a single plan that fulfils two core financial requirements, i.e., building wealth for the future and securing their family members' present. Here are the top reasons to consider an endowment plan:

Dual Benefit of Savings and Security:

It's a two-in-one product. You get a guaranteed lump sum on the maturity of the policy to fund your long-term goals, and your family member receives a death benefit if you pass away in the course of the term.

Disciplined Wealth Creation:

The fixed premium schedule enforces a regular savings habit, helping you systematically build a substantial corpus. In participating plans, this is further enhanced by bonuses. This assists your investment growth through the best investment plans.

Customisable Protection:

You can significantly expand your financial safety net by adding riders. These riders are critical illness, accidental death or disability. Adding such riders assists you in tailoring your cover as per your particular needs.

Flexibility and Tax Benefits:

Such plans offer the freedom to opt for a premium payment frequency that matches your budget perfectly. Moreover, they endow tax benefits as per Sections 80C* and 10(10D) of the Income Tax Act, 1961*, which makes them a tax-efficient tool for the purpose of financial planning.

Who should consider buying an endowment plan?  

An endowment plan suits individuals who want life cover along with structured, predictable maturity payouts, making it ideal for long-term financial planning. It fits risk-averse investors who prefer stable returns without market-linked fluctuations. 

Parents or guardians aiming to secure a child’s higher education/future milestones even benefit from its disciplined savings structure. It works well for anyone targeting goals over the long term, such as higher education, marriage or retirement. 

The ones who appreciate low-risk investments backed by insurance protection and individuals who value financial discipline through regular premium payments will find an endowment policy particularly suitable.

 What Are the Documents Required to buy Endowment policy?

Your identification and financial assessment play a crucial role in determining which type of endowment plan you are eligible for. Insurance companies verify these documents at the time of purchase. 

For Policy Application

1. You need to submit a valid government-issued identity, i.e., Aadhaar, PAN, Voter's ID, Driving License or a Passport, as proof of your identity as well as age. 

2. Address proof, i.e., Aadhaar, Utility Bills (Electricity, Telephone and Gas bills), Passport, Bank Statement or Rent Agreement.

3. Medical examination reports are required to finalise the sum insured amount.

4. Employment details, as well as bank statements, are required to confirm your ability to make payment of the premiums.

For Maturity Claim

When the policy matures, you need to submit documents such as the claim form, Discharge Voucher and original policy documents to the insurer to further proceed with the claim. 

For Death Claim

In case of the policyholder’s death, the beneficiaries need to submit their identity proof and the death certificate of the policyholder. 

Here are the documents you must keep handy for a stress-free experience:

Difference Between an Endowment and a Money-Back Policy

Both endowment insurance and money-back policy offer life cover along with savings benefits. However, they vary in structure as well as payout flexibility. Here’s a comparison:

What Happens When an Endowment Policy Matures?

An endowment policy is designed to reward disciplined savings while providing life insurance protection throughout the policy term. But what exactly happens when the policy reaches maturity?

The following steps occur once an endowment insurance matures: 

Step 1: When the policy matures, the insurer notifies the policyholder and asks for submission of policy documents, a maturity claim form and proof of identity. 

Step 2: Once the document verification is over, the maturity benefit is paid out. 

Step 3: After the payment of the maturity benefit amount, the policy closes.

Step 4: The received amount can be reinvested or converted into an annuity to earn a regular income. 

Depending on what type of endowment plan you own, the maturity benefits will differ. For example, if you choose a non-profit endowment, you will not be eligible for any additional bonuses.

If you choose a unit-linked policy, the premium you pay is converted into units of the selected investment funds. These units can be cashed out to cover life insurance. You have the freedom to choose which proportion of premium units to invest. In case of the policyholder’s demise, the death benefit goes to the beneficiary. 

All these factors make the policy a great choice for those who are looking for a long-term investment plan and, at the same time, financial protection for their family.

Are Endowment Plans Tax-Free?

Endowment plans offer significant tax benefits under the Income Tax Act, 1961, both while paying premiums and when receiving returns at maturity. Understanding these can help you maximise your returns and lower tax liability while staying compliant with the law.

Premium Deduction

Premiums that are paid for a life insurance policy benefit you, your spouse or your children. They are eligible for deduction as per Section 80C of the Income Tax Act, 1961* for an amount of up to ₹ 1.5 lakh per financial year. Premiums paid for parents or other relatives do not qualify. This tax deduction minimises your taxable income and assists you in continuing regular investments without missing out on tax savings.

Maturity Benefits Exemption

The amount you receive at maturity including the sum assured and any bonuses is generally exempt from tax under Section 10(10D) of the Income Tax Act, 1961*, provided certain conditions are met: the premium should not exceed 10 % of the sum assured for policies issued on or after 1 April 2012 (20 % for earlier policies), and the policy should not be surrendered or terminated prematurely. When these conditions are satisfied, no TDS is deducted, and you maximise your post-tax returns.

GST Exemption on Endowment Plan

From 22 September 2025 onward, premiums that are paid for individual life insurance policies, involving endowment plans, are exempt from Goods and Services Tax (GST). This means you will pay just the base premium amount, improving affordability and enhancing your net returns from the plan.

Summary

An endowment policy is a well-structured plan that combines life insurance protection with long-term and disciplined savings. By making payment of premiums periodically, policyholders steadily build a savings corpus that supports wealth creation as well as future financial planning. 

The policy endows dual benefits. Maturity payouts occur when the term of the policy is completed and provide financial security for the family members if the policyholder passes away during the term. Also, it provides practical flexibility via loan and surrender options. These options permit access to the policy’s cash value in the course of any financial exigencies without derailing long-term goals. 

With its predictable, low-risk growth and stable returns, an endowment policy comes across as a well-suited instrument for conservative individuals looking out for security, savings and steady financial progress.

Frequently Asked Questions (FAQs) on Endowment Policy

1. How to calculate endowment policy premiums?

Endowment policy premiums are computed based on parameters, i.e., the policyholder's age, desired coverage and length of the policy. An insurance company uses these variables to determine the premium amount and potential maturity benefits.

2. Are endowment plans good or bad?

Endowment plans can be considered good for the ones seeking both protection as well as savings. But they might not be a prudent option for the ones who prioritise quick cashflow/require higher returns on making investment.

3. What are the disadvantages of an endowment policy?

Some essential drawbacks of an endowment policy are lower returns when compared with other financial options, limited flexibility when it comes to withdrawing funds before maturity and the possibility of witnessing inflation, which minimises the actual value of the returns of the policy. It is essential to carefully factor in personal financial goals and risk appetite level before opting for an endowment policy.

4. What is a 20-year endowment policy? 

A 20-year endowment policy is ideal for long-term financial planning. Suppose the policyholder receives the maturity proceeds if he outlives the 20-year term. In case of a mishap during the 20-year term, the nominee receives the death benefit. 

5. Which endowment plan is best?

The best endowment plan depends on what the investor is looking for. It depends on the financial objectives, premium affordability, cover and wealth creation requirements, the riders required and the tax benefits.

6. Can I customise my endowment policy?

Yes. You can customise your endowment policy as per your financial needs and affordability. You can choose the sum assured, premium payment frequency, and the term to align with your financial goals. Also, you can select riders to maximise the coverage.

7. What is meant by an endowment policy?

An endowment policy is a life insurance plan that provides protection plus savings. It endows a sum assured to the nominee if the policyholder passes away in the course of the term, and pays a maturity value, usually with bonuses, if the policyholder survives the term of the policy. 

8. How does a 20-year endowment policy work?

A 20-year endowment policy requires regular premium payments for the chosen term. If the policyholder survives 20 years, they receive the maturity amount. If they pass away before that, the nominee gets the sum assured, ensuring long-term protection as well as disciplined savings.

9. What is a 10-year endowment policy?

A 10-year endowment policy is a shorter-term plan where the policyholder pays premiums for a span of ten years. It provides life cover throughout the period as well as offers a maturity payout towards the end of the term, which makes it suitable for mid-term goals.

10. How do returns from an endowment policy compare with mutual fund SIPs?

Endowment policies offer stable and low-risk returns with guaranteed benefits and bonuses. However, mutual fund SIPs provide market-associated returns with higher growth potential but greater risk. Endowment plans are prudent for conservative savers. And SIPs are well-suited for retail investors looking out for long-term market-driven growth.

11. What is the difference between an endowment policy and term insurance?

    An endowment policy endows life cover as well as a maturity payout, combining protection with savings. Term insurance provides pure life cover with no maturity benefit, which makes it affordable and focused solely on financial protection for dependents.