Endowment Policy

Table of Content

1. What Is an Endowment Plan?

2. How Does an Endowment Policy Work?

3. What are the types of endowment plans?

4. What are the benefits of an endowment policy?

5. What are the features of an endowment plan?

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

7. Why should a person purchase an Endowment Policy?

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

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

10. What Happens When an Endowment Policy Matures?

11. Summary

12. Are Endowment Plans Tax-Free?

13. FAQs on Endowment Policy

A life insurance policy is the best avenue to secure the financial future of your loved ones. A combination of life coverage and investment offers the best financial safety net for your family, something you can get from an Endowment policy. It also helps build a corpus to fulfil your financial goals, like creating an asset, meeting the education expenses of your children, and more. 

However, before you opt for an endowment plan, it is imperative to know what is endowment policy.

An endowment plan meaning is life insurance plan that offers both death as well as maturity benefits. The beneficiaries receive the sum assured by way of the death benefit if the policyholder expires during the policy term. On the other hand, if the policyholder survives the term, they will get a lump sum amount by way of maturity benefit.

What Is an Endowment Plan? 

An endowment plan is a type of life insurance policy that provides life cover as well as a maturity benefit. The life cover component provides a lump sum payout to your loved ones in the case of your unfortunate demise, while the maturity benefit component provides a fixed payout given at the time of maturity. The returns help you achieve your investment goals such as buying a car, paying for a down payment for a house or child’s education.

How Does an Endowment Policy Work?

Understand how the policy works for an informed decision concerning an endowment policy. Here is a step-by-step guide that shows how an endowment plan functions:

Step 1: Choose Your Policy and Coverage Amount

Several plans are available under the endowment policy. Choose a policy and the sum assured that matches your requirements. The premium allocation depends on the coverage amount (sum assured) and the policy term. You get guaranteed returns, i.e., the predetermined sum assured, along with a bonus as a maturity benefit if nothing untoward happens during the policy term. The sum assured determined at the time of policy purchase ideally should be adequate to fulfil your future financial goals.

Step 2: Decide the Premium Payment Frequency

The premium payment frequencies offered are monthly, quarterly, half-yearly, and yearly. Choose the premium payment frequency that suits your income pattern. 

Step 3: Accumulate Wealth Over the Policy Term

The regular premium payments required to keep the endowment plan in force instil a disciplined savings habit and help accumulate wealth over the policy term. 

Step 4: Maturity Benefit Payout

If no mishap occurs during the policy term, the insurance company pays out an amount decided while applying for the policy as a maturity benefit, irrespective of market conditions.

Step 5: Death Benefit For Financial Security

The life coverage component of an endowment life insurance policy provides financial protection to your family. In the case of the policyholder’s unfortunate death during the policy term, the nominees receive a lump sum as a death benefit. This helps them to take care of the family’s future financial needs. 

Step 6: Tax Benefits and Finance Planning

Prudent financial planning lies in investing in tax-efficient plans. For instance, the premiums you pay towards certain life insurance plans, including many endowment plans, can qualify for deduction under Section 80C of the Income Tax Act, 1961¹. Additionally, the death benefit payouts from life insurance policies are generally tax-exempt under Section 10(10D) of the Income Tax Act 1961¹. 

What are the types of endowment plans?

Information about the customisable plans available under endowment policy to suit individual financial goals is important besides knowing the endowment policy meaning:

• Unit Linked Endowment Plan

This ULIP plan is a combination of life cover and wealth creation. This endowment plan is suitable for individuals who aspire for both financial security for the family as well as returns on investment. A part of the premium paid by the policyholder is invested in the market, and the rest of it is utilised to offer life coverage. An additional advantage is the policyholder is given the choice of fund type. The choice depends on the policyholder's appetite for risk.

• Endowment with full profits

This plan provides for predetermined assured returns. This plan mitigates the risk of market fluctuations by paying out an assured amount on the maturity of the policy or the untimely death of the policyholder. The policyholder is entitled to additional bonuses declared by the company from time to time which will be paid out along with the survival benefit or on the untimely death of the policyholder.

• Low Cost Endowment

The premiums fixed for this plan are low and can be an ideal long-term savings plan for individuals who intend to create a corpus for financial goals that are way ahead, like children’s higher education, children’s marriage, post-retirement fund, etc. The funds accumulated will be paid at the end of the policy term. The corpus created can also be utilized to pay off loans as well. Among the different types of life insurance plans, low-cost endowment plans are the most popular as they enable the creation of a corpus with nominal investment. To determine how much you should be saving and to get a clearer picture of your premium and coverage needs, you can use a life insurance calculator to plan and optimize your investment effectively.

• Non Profit Endowment

If you want predictable and predetermined returns, a non-profit endowment policy is the ideal plan for you. A guaranteed sum will be given upon the maturity of the policy or the death of the policyholder. No bonuses or profits beyond the guaranteed amount will be given. The sum assured at the time of purchasing the policy will be the final payout.

• Guaranteed Policy

A guaranteed policy ensures that the policyholder gets a guaranteed amount upon the maturity of the policy or in the event of the demise of the policyholder during the policy term. The payout is guaranteed irrespective of the returns on investment made by the insurance company with the premiums paid by the policyholder.

• Limited Premium Payment Endowment Policy 

This endowment plan allows premium payments for shorter periods but provides coverage for longer terms. The premiums are, however, higher for these plans. Individuals with a limited opportunity to earn a high income cannot sustain the premium burden for longer periods, and they prefer these plans. 

• Money Back Endowment Policy 

Under this plan, the policyholder receives periodical payments throughout the policy term in addition to the maturity benefit. This arrangement provides liquidity during the policy term and makes funds available for short-term financial needs or emergencies.

What are the benefits of an endowment policy?

An informed decision while purchasing a policy can be made only on understanding what is endowment policy is and the associated benefits. The several benefits of an endowment policy are given below:

1. Ensure financial security for your family

You now know the endowment plan meaning and that it offers dual benefits of life cover as well as savings. If anything unforeseen happens during the policy term, the beneficiaries or the nominee will get a lump sum amount providing financial security for your family. Some endowment plans also provide additional benefits by way of bonuses, which can be redeemed along with the death benefit.

2. Helps Build Savings

Endowment plans integrate life insurance and disciplined long-term savings. The regular premiums culminate in a guaranteed return paid out at the end of the term, along with a bonus if you survive the policy term.  In brief, the plan ensures a low-risk growth while protecting your family financially.

3. Flexibility to Choose Premium Payment Frequency

The endowment plan offers flexible premium payment options depending on the convenience of the policyholder. It can be paid monthly, quarterly, half-yearly, or yearly. The flexibility allows the policyholder to budget and plan the savings.

• Loan Option

Unlike traditional insurance, you can avail of a loan against the endowment policies. Banks and other financial institutions provide a percentage of the surrender value or the cash value of the policy as a loan, making it a  liquid investment product.

• Maturity Benefits

Additional benefits in the form of guaranteed additions and bonuses announced by the insurer from time to time are offered along with the sum assured in some endowment plans. This increases the fund value and helps in substantial wealth creation for the systematic investments made in the investment plans.

• Tax Advantages

Investing in an endowment policy has the advantage of tax benefits, apart from financial protection and wealth creation. The tax deduction allowed for the premiums paid towards the plan under Section 80C of the Income Tax Act, 1961 reduces your overall tax liability to some extent. Also, the maturity or death benefit payouts are tax-exempt under Section 10(10D) of the Income Tax Act, 1961¹, which maximises the savings returns.

What are the features of an endowment plan? 

• Systematic Savings Option

The flexible premium payment facility provides a systematic savings option. The regular premium payments enable you to create a corpus in the long run without burning a hole in your pocket.  

• Maturity Benefit

If you survive the policy term, you receive a fixed amount determined at the time of policy purchase, along with an accumulated bonus on maturity. Also, the maturity benefit is tax-free which optimises the returns.

What should you look for before purchasing an endowment policy?

If you are buying an endowment plan for the first time here are some factors to consider:

• Goals of the policyholder

Have a clear understanding of your financial goals and needs. Endowment plans cater to long-term financial goals and since the returns are significant and risk free, these plans work best for retirement goals, kids’ education and marriages, etc. An endowment plan is not a suitable option to meet immediate or short term goals.

• Endowment plan features

Always go through the features of all plans you are considering to understand the terms with clarity. Assess coverage, duration, premium to be paid, maturity amount and returns, availability of riders and more. You must compare different plans and opt for the one that meets your needs the best.

• Importance of an endowment plan

It is good to remember that an endowment plan is chosen for its assured returns over long-term savings. It also offers life coverage and a savings component that is a much better investment that basic term plans. For some investors an endowment plan may seem lucrative due to their tax benefits, though tax benefits are available through many other policies offering insurance benefits. It is therefore, important to identify the reason why you want to invest in an endowment plan and whether it will truly benefit you or not.

You can take advise from a financial advisor or consultant to understand more about endowment plans and their suitability to your financial goals and needs. It is best to make well informed financial decisions for best returns.

Why should a person purchase an Endowment Policy?

The reasons to purchase an endowment policy abound. Some of them are:

• The endowment life insurance policy provides a dual benefit of life cover and protection. It instils disciplined savings habits and serves as a financial safety net for your family.

• Endowment plans are ideal for risk-averse investors who prefer capital protection with guaranteed returns. 

• Tax benefits are an additional advantage in endowment plans. You can claim tax benefits up to Rs. 1.50 lakhs under Section 80C of the Income Tax Act, 1961¹  for the premiums paid. Also, the maturity and death benefits are tax-free under Section 10(10D) of the Income Tax Act, 1961.

• If the policyholder expires before maturity of the plan, the nominees receive a tax-exempt death benefit.

• If the policyholder outlives the policy term, he receives a predetermined sum assured along with the accumulated bonus as a maturity benefit.

What Are the Documents Required to buy Endowment policy?

Given below is the list of documents required to buy an endowment policy. Also shared are documents required to make a maturity claim and a death claim.

Documents Required for Application:

• Application form
• Photograph of the applicant
• Address proof
• Proof of income

Documents Required for Maturity Claim:

• Discharge Voucher
• Endowment Policy Document

Documents Required for Death Claim:

• Death certificate
• Claim form
• Endowment Policy Document
• Assignment/ Re-assignment deeds if any
• Discharge form — Executed and witnessed

Difference Between an Endowment and a Money-Back Policy

Here are some of the most common and prominent differences between an endowment and a money back policy:

What Happens When an Endowment Policy Matures?

An endowment policy offers a dual benefit. Upon maturity (the end of the policy term), you receive a lump sum payout (sum assured + bonuses) if you survive. If you pass away during the term, your beneficiaries get a death benefit. This makes it a suitable option for long-term savings goals and financial security for your loved ones.

Summary 

With so many investment tools in the market, choosing the one that aligns with your needs can be overwhelming. Investors looking for growth-oriented options prefer the endowment plans.  The policy offers death and maturity benefits, which makes it a more popular choice. If your family’s financial security, combined with a savings component, is your preference, then an endowment policy is the one.

Are Endowment Plans Tax-Free?

Returns from endowment plans are exempt from taxes, subject to some limitations. Policyholders, nominees, and potential buyers should be aware of two kinds of tax benefits for endowment plans:

• Premium Deduction: Policyholders are eligible to receive a deduction on the premiums paid according to Section 80C of the Income Tax Act 1961¹. The deduction is capped at a maximum of Rs 1,50,000 per year.
• Benefits Exemption: Tax exemption can be claimed on the benefits received from the endowment plan under Section 10(10D) of the Income Tax Act 1961¹. This exemption encompasses both the maturity benefit and the death benefit. However, certain criteria must be met to qualify for this exemption.

FAQs on Endowment Policy

1. How is endowment policy calculated?

Endowment policy premiums are calculated based on factors such as 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 individuals seeking both protection and savings. However, they may not be ideal for those who prioritise immediate cashflow or require higher returns on investment.

3. What are the disadvantages of endowment policy?

Some disadvantages of endowment policy include lower returns compared to other investment options, limited flexibility in withdrawing funds before maturity, and the possibility of inflation reducing the real value of the policy's returns. It is important to carefully consider personal financial goals and risk appetite 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. If 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, coverage 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 according to your financial needs and affordability. You can choose the sum assured, premium payment frequency, and the term to align with your financial goals. You can also select riders to maximise the coverage.