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Life insurance plays a crucial role in strengthening our financial health. But what if you could protect your family from financial problems while building a substantial savings fund? That's precisely what an Endowment Policy offers: a blend of both a savings plan and an insurance plan, providing you with the benefits of both.With different Endowment Policy types, you can manage your investments safely with guaranteed returns on your money. Furthermore, these plans also come with tax benefits, making it a more lucrative investment option for people of all ages.
Understanding Endowment Policies
Endowments are policies that offer dual benefits to their investors. It provides long-term savings along with insurance coverage for the policyholder. Endowment plans make for an effective investment plan that helps you save money for your future, along with insurance protection. You can choose from different types of endowment insurance according to your risk profile and build a disciplined saving habit. The insurance company will provide the insurance money to the policyholder or their family in the event of death. The insurance company will provide your family with the maturity amount and additional benefits if the insurance matures before your death. Also read : What Does Pure Endowment Mean?
Different Types of Endowment Plans
Endowment Policies differ depending on various factors, such as the risk involved, the amount covered, and the kind of insurance it entails. The different types of Endowment Policies that you can opt for are as follows:
Unit-linked Endowment Plan
These plans are best suited for people with high-risk tolerance, providing investors with higher returns. You have to use a premium account to purchase units of this fixed-term policy. However, the final return of this plan will depend on the market's overall performance. This plan also comes with life coverage for the person insured. This plan is similar to the ULIP plan as it also functions based on units and offers dual benefits.So, compare these plans if you plan to take a unit-based plan.
Full Endowment Plan
These Endowment Plans offer a fixed lump sum or income benefit and life cover. The amount received on maturity is higher than the assured amount in most cases due to the growth of investment and the addition of yearly bonuses to the account. This plan helps policyholders earn extensive profits on their capital over time, making it one of the best types of endowment insurance.
Low-cost Endowment Plan
People commonly refer to the low-cost Endowment Plan as a mortgage Endowment Plan. You can get a low-cost Endowment Plan if you want funds to make your mortgage payments or repay your loans. This plan helps you clear your debts by paying a lump sum on maturity.In case of your death, it will cover your expenses or loans by maturity amount. The beneficiary registered on the account will receive the amount. Furthermore, if you want regular returns on the investment, opt for a money-back policy. Also read : Money-Back Policy vs Endowment Policy
UNITISED with Profit Endowment Plan
It is a hybrid plan that balances unit-linked policy fluctuations and gives investors decent returns. The unit's value under this plan is revised annually, and this plan also guarantees a minimum payback amount after its maturity. The guaranteed payback amount is to remain untouched during the policy's duration, and it will remain isolated from risks of market volatility. Thus, this plan is the safest option if you want to have a guaranteed fixed amount from your investments.
Participating Endowment Plan
A participating Endowment Plan is one in which the insurer shares a portion of the profit earned on your investment. The insurance company may distribute the profit as a bonus, offering investors additional investment returns.
Non-Profit Endowment Plan
In the non-profit Endowment Plan, the policyholder is eligible to receive a predetermined lump sum amount in the event of policy maturity or the policyholder's death. This plan best suits people looking for life coverage without putting their principal amount at risk. However, you won't benefit from the principal amount, as the insurer does not offer any bonuses under this plan.
Whole life Endowment Plan
These endowment life insurance policies are ideal for people looking for coverage up to 100 years of age. Although the premium payment tenure is limited, the plan provides lifelong insurance coverage. The insurer pays out an assured sum if the policyholder dies. If the policy matures before the policyholder's death, the insurer pays the maturity amount.
Endowment Policy - A pseudo-life insurance policy
An Endowment Policy is not simply a life insurance policy but a hybrid one. It combines the benefits of investment with life coverage. Different types of endowment life insurance policies have multiple features depending on the target beneficiary and the type of policy.Furthermore, the Endowment Plan also comes with tax benefits; you can take loans against your policy. Some types of endowment insurance also offer policyholders an option to opt for higher risk on their investment, which gives them a bonus for their capital, maximising their corpus upon maturity.
Need for an Endowment Policy
Endowment plans offer various benefits to the policyholders. Some of the key factors that make Endowment Policies a must-have are as follows:
Tax savings
The Endowment Plans are tax efficient, saving you considerable money on taxes. As per section 80C of the Income Tax Act 1961, approximately 10% of the total sum assured under the policy is eligible for tax deductions. Furthermore, the death benefits and bonuses received under the policy are tax-free.Suppose the premium amount is 10% of the total sum assured in the policy. In that case, you will not be eligible for taxes on the received complete maturity amount, including bonuses and additions under Section 10 (10D).
Dual benefits
Endowment Policy types consist of two components: savings and insurance coverage. The savings component aids in accumulating a substantial corpus for yourself, while the insurance component provides financial support to your family in the event of your death. Therefore, these policies assist you in building savings and ensure financial protection for your family in case of your demise.
Higher returns
Almost all Endowment Policies offer attractive returns in terms of bonuses and help you generate a considerable corpus at maturity. These plans allow you to make decent returns, which is not an option with a simple insurance policy.With the participating Endowment Plan, you will get a share in the company’s profit through dividends or bonuses. Thus, it is good to always compare different Endowment Policies before deciding to maximise returns.
Risk-free investments
Endowment Policies are one of the safest investment options with which an individual can create a considerable corpus. Furthermore, the death and maturity bonuses and benefits are independent of market performances and, thus, remain relatively independent and safe. You also get an option to exit the policy to convert it to paid-up or surrender the policies and retrieve your money.
Endowment vs. Whole Life Insurance Policy
Endowment and Whole Life Insurance policies are types of endowment life insurance policies. They are different from term insurance and thus used to accumulate cash value. This way, policyholders are assured of the return of some premium amount. These policies pay a lump sum to the policyholder either upon their death or when their policy matures.Though it is the same in some factors, there is a significant difference between an Endowment and Whole Life Insurance. Endowment Plans usually have shorter coverage, while whole life policy offers more extended coverage (between 100 and 120 years).Therefore, Whole Life Insurance is less likely to mature, as the payout is to the policyholder's beneficiaries upon the policyholder's death.Let's have a look at the comparison chart between whole life insurance and endowment policy.
| Whole life insurance policy | Endowment Policy | |
| Definition | Whole life insurance is a kind of permanent life insurance policy. It continues for an unspecified period until the death of a policyholder. It also combines saving and investment strategies for the policyholders. | Endowment is a hybrid insurance policy that offers long-term savings in the form of maturity amount along with insurance coverage. It is majorly marketed as a college savings policy. |
| Payment duration | The payment is made back to the policyholder upon their death or continues up to 100 years to maturity. | The insurance amount is paid in a lump sum within a specific year. It can be paid on the death of a policyholder or may extend from 10 to 20 years until the insurance matures. |
| Premium | The monthly premium amount is relatively lower. But the overall premium exceeds the term life insurance premium. The whole life insurance has a higher premium amount because it gets eventually paid and builds a cash value. | Premium is paid over a short period. It has high monthly premiums. The shorter the endowment plan is, the higher the premium amount. |
| Factors to consider | Policy cash value, participating or non-participating, payout, premium amount. | Investment rates, premium amount, coverage term, benefit amount. |
| Benefits | The cash value component grows over time. Premium levels are distributed, due to which it becomes affordable. It covers lifelong coverage. Offers various tax benefits. | Builds cash value at a faster rate due to a limited period to pay a premium amount. Premium payment is made to policyholders in a lump sum in case of any illness or event of death. Otherwise, it is paid on maturity. |
| Types |
They are majorly of 4 types:-
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Some of the most common types of endowment life insurance policyare:
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If your liabilities increase over time and you decide to exit your Endowment Plan, here are some ways to do that.
- Surrender the policy When you choose to surrender your insurance plan, you get all your money, and the amount you receive is the percentage of the total premium you paid after deducting the first year's premium.
- Opting for paid-up The paid-up plan is possible only after you have paid all your premiums for three years at least. At the end of your policy tenure, you will receive the paid-up value, less than the assured amount.
Also read: Endowment Plan vs Term Plan vs ULIPs - Which One to Choose?
Bottom line
Endowment Plans are a haven for investors looking for guaranteed returns and a secure financial future for their families. However, everyone must analyse various types of endowment insurance plans before deciding. Selecting the plan that best suits your requirements is a must.
FAQS - FREQUENTLY ASKED QUESTIONS
How are participating and non-participating Endowment Plans different ?
A participating Endowment Plan includes sharing insurance profits through bonuses or dividends. It is known as the with-profit policy, and unit-linked insurance plans fall into this category.
Policyholders do not get a share of the profit in a non-participating Endowment Plan. These policies are known as non-par or without-profit policies. Term insurance or permanent life insurance policies are some examples of such plans.
Furthermore, participating plans provide protection and considerable returns. In non-participating plans, premiums are lower than the cost of participating policies.
Are Whole Life Insurance and Endowment Plans the same ?
No, both Whole Life Insurance and Endowment Plans are different. Whole Life Insurance is a type of permanent Endowment Plan. Their maturity periods are the only significant difference between Whole Life Insurance and Endowment Plans. The maturity of the Whole Life Insurance Policy is around 100 years. The premium amount will be paid to policyholders only upon death, as its maturity time is longer.
The Endowment Plan has a higher premium due to its lower maturity than whole-life insurance plans.
These plans pay out upon the policyholder's death or maturity.
Why should I go for Endowment Policy types ?
An Endowment Plan allows you to enjoy the dual benefit of savings and an insurance policy. There are various types of Endowment Plans, like unit-linked Endowment Plans, where you can buy units of the policy, and plans such as low-cost Endowment Plans to get loans or mortgage endowments.
You also get an option to get a share of the insurance company's profit on your Endowment Plan by opting for the participating Endowment Plan. Apart from the variety of Endowment Policy types, you also get tax benefits, and these deductions can even make your investments in these plans tax-free.
How does a non-profit Endowment Plan benefit an individual ?
This plan allows individuals to accumulate a huge corpus for their family. In this policy, your corpus won't suffer anything and will remain unchanged throughout the maturity. Thus, the plan is a safety net for your family and will safeguard them from financial distress.
The savings corpus will get passed on to your family upon your death, or you will get the amount upon maturity. Non-profit insurance plans are unsuitable if an individual wants to get benefits and extra income from their Endowment Plan.
What is the best way to surrender an Endowment Policy ?
There are two ways that you can use to surrender your Endowment Policy. First, by converting it to a paid-up plan. Factors to surrender your Endowment Policy depend on your investment horizon position. So, if there is still a long time before the policy matures, you should surrender the Endowment Policy. This way, you can get a decent sum of your premium and quickly fulfil your urgent requirements.
However, if you do not wish to continue paying a premium and your maturity date is near, you can surrender your plan and may opt for paid-up plans. It will benefit you most from your plan, and you will get the bonuses on your past payment.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
