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 should you look for before purchasing an endowment policy?

6. Why should a person purchase an Endowment Policy?

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

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

9. What Happens When an Endowment Policy Matures?

10.Are Endowment Plans Tax-Free?

11. Summary

12. FAQs on Endowment Policy

What Is an Endowment Plan? 

An endowment plan is a life insurance policy that offers both life cover and a maturity benefit. The life cover component provides a lump sum payout to your nominee in case of your unfortunate demise, while the maturity benefit provides you a fixed payout (sum assured plus any bonuses) at the time of maturity if you survive the policy term making it perfect for risk-averse individuals.

This structure blends insurance protection with disciplined savings, making it ideal for long-term goals. For Instance:

Scenario 1 (Survival): Mr. Suriya buys a 15-year plan to fund their child's education. At maturity, they receive the ₹10 Lakh sum assured plus a ₹2 Lakh bonus.

Scenario 2 (Death): If Mr. Surya pass away in the 8th year, their family still receives the full ₹10 Lakh sum assured, ensuring financial stability.

How Does an Endowment Policy Work?

An endowment policy works by blending insurance coverage with systematic savings. Here is a simple breakdown of how the process works from policy selection to maturity or claim.

Step 1: Choose Your Policy and Coverage Amount: 

You start by choosing a sum assured and a policy term based on your financial goal, such as 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 choose on which ever fits your budget the best.

• Monthly: Ideal for salaried individuals who prefer budgeted, steady outflows.

• Quarterly/Half-Yearly/Annually: Suitable for business owners or freelancers with variable income.

Most insurers offer auto-debit or ECS options, ensuring you never miss a premium. Timely payments are crucial to keep the policy active and eligible for bonuses.

Step 3: Accumulate Wealth Over the Policy Term

Through out the policy term, your regular premiums build your savings corpus while also providing you with a Life cover. The insurer invests these funds, and your policy also accumulate bonuses which encances the final payout. This creates a disciplined, “forced savings” habit.

Step 4: Payout Phase

At the end of the term, one of the two guranteed events occurs:

• Maturity Benefit: If you survive the policy term, you recieve the full Sum Assured plus and accumulated bonuses.

• Death Benefit: If death occurs during the policy term, your nominee will recieve the Sum assured to ensure their financial securtity.

Step 5: Tax Benefits and Financial Planning

Endowment policies offer tax advantages that enhance their financial appeal:

• Premiums paid are eligible for deductions up to ₹1.5 lakh under Section 80C^*.

• Payouts (maturity/death) are generally exempt under Section 10(10D)^*, provided premiums are within specified limits (i.e., not exceeding 10% of the sum assured for policies issued after April 1, 2012).

This makes endowment plans not just a protection tool, but also a tax-efficient investment that supports responsible financial planning. 

What are the types of endowment plans?

IInvesting 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. 

Unit Linked Endowment Plan (ULEP)

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

• How it Works: A portion of your premium secures your life cover, while the remaining amount is invested in market funds you choose (e.g., equity, debt, or a mix).

• Returns: The final payout is linked to the performance of these funds, offering the potential for higher returns, but also carrying market risk.

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

Endowment with full profits

Also known as participating endowment plans, these plans offer guaranteed benefits at maturity.

• How it Works: It provides a guaranteed sum assured at maturity or death. This guaranteed amount is enhanced by non-guaranteed bonuses (like Reversionary and Terminal bonuses) declared by the insurer based 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.

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 primary goal is to accumulate a target fund equal to a future liability. The focus is on capital accumulation at a minimal cost rather than high growth, making the premiums more affordable.

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

• Ideal for: Individuals who need a disciplined savings tool to pay off a long-term debt, such as a home loan, or to fund a specific life goal affordably.

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 benefit and death benefit are predetermined and stated clearly when you buy the policy. There is no variability from 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 and certainty in their financial planning.

Clarification: “Non-profit” doesn’t mean the plan is charitable. It simply means no additional earnings beyond the promised benefits.

Guaranteed Policy

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

• How it Works: The policy contractually guarantees a specific sum of money that the policyholder or nominee will receive. This amount remains unaffected by the insurer’s investment performance or market fluctuations.

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

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

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.  

Money Back Endowment Policy

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

• How it Works: It functions like an endowment plan but pays out a certain percentage of the sum assured as "survival benefits" at regular intervals during the policy term. The remaining sum assured, along with any accrued bonuses, is paid at maturity.

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

• Ideal for: Individuals who need funds for recurring milestones, such as 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 combination of life insurance and systematic savings, making them one of the most versatile and low-risk financial products for long-term planning. Here are the key benefits:

Life Cover for Family Protection

The life cover of an endowment plan provides a financial safety net to the policyholder's family in unforeseen circumstances. Not only does the family receive the predetermined sum assured amount, 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.

Helps Build Savings

One of the biggest advantages of endowment policies is that they promote disciplined saving habits.

• Regular premium payments act like forced savings.

• The guaranteed maturity benefit, often with bonuses, helps you build a sizable corpus.

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

Flexible Premium Payment Options

Endowment plans provides 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. 

 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.    

Maturity Benefits

When you sign up with 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.   

Tax Advantages

There are multiple stages where you get tax advantages with an endowment policy. As per Section 80C^*, when you pay the premium, you get a tax deduction. Then, upon maturity, you get 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 of it, you should evaluate your goals and the policy’s features carefully. Here's what to consider before you sign up:

Alignment with your Financial Goals

Clearly define your financial goals, both from long-term investment and short term investment perspective depending on the objective you want to achieve. When selecting the sum assured, remember to factor in inflation to ensure that the final payout will have enough value to meet your future needs. You can use a savings calculator or a Child education planner to plan this out.

Flexibility in Premium Payments:

Check the available premium payment terms. Does the plan offer a limited pay opion (where you pay for a shorter duration than the policy term) or only a regular pay option? Choose a frequency (monthly, quarterly, half yearly or annually) that aligns well with your income stream.

Availabile Riders for Enhanced Coverage:

Look for useful riders to enhance your base policy. Common and valuable riders include:

• Critical Illness Cover: Provides a lump sum on diagnosis of major illnesses.

• Accidental Death Benefit: Offers an additional payout in case of accidental death.

• Waiver of Premium: Waives future premiums if the policyholder becomes disabled or critically ill.

Please note that the riders are available on payment of additional premium.

The Insurer's Credibility:

Your policy is a long-term contract, so the insurer's reliability is crucial. Before buying, always check two key metrics:

• Claim Settlement Ratio (CSR): A ratio above 95% is generally considered good and indicates the insurer's track record of honoring 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.

Bonus History (for Participating Plans):

If you are considering a "with-profit" or participating plan, review the insurer's history of declaring bonuses for the last 5-10 years. While not a guarantee of future performance, a consistent track record is a positive indicator.

Why should a person purchase an Endowment Policy?

An endowment policy is a strategic financial choice for indviduals seeking a single plan that fullfills two core financial needs: building wealth for future and securing their family’s present. Here are the key reasons to consider an endowment plan:

Dual Benefit of Savings and Security:

It's a two-in-one product. You receive a guaranteed lump sum on the policy's maturity to fund your long-term goals, and your family receives a death benefit if you pass away during 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, helping your investment grow through best investment plans.

Customizable Protection:

You can significantly expand your financial safety net by adding riders for critical illness, accidental death, or disability, tailoring the coverage to your specific needs.

Flexibility and Tax Benefits:

These plans offer the freedom to choose a premium payment frequency that suits your budget. Moreover, they provide tax advantages under Sections 80C and 10(10D)^* of the Income Tax Act, making them a tax-efficient tool for financial planning.

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 ID, such as an Aadhaar Card, PAN card, Voters ID, Driving License or a Passport, as proof of your identity and age.  

2. Address proof, such as 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 and bank statements to confirm your ability to pay 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 is a breakdown of documents you will require for a hassle-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 differ in structure and payout flexibility. Here’s a quick comparison: