What is an Endowment Policy? How to select the best endowment plan?
Insurance is an agreement in which the insurer guarantees compensation for a specified loss of the insured, in return for a series of payments in the form of a premium. The most common form of insurance is life insurance. Life insurance is also of various types such as term insurance, endowment plan, and whole life insurance, amongst others. This article will focus on one of the most famous life insurance plans called an Endowment Policy. This article will tell you what is endowment plan in detail while enlisting its benefits and what you should consider while buying an endowment policy.
Summary in Brief
- What is an Endowment Policy?
- Types of Endowment Policy
- Benefits of Endowment Policy
- What to consider while buying an endowment plan?
What is an Endowment Policy?
An endowment Policy is a type of Life Insurance Policy with dual functionality of life insurance coverage along with savings. In this policy, the premium paid is divided into two parts, one part is invested for the insurance, while the other is saved. The insurance amount can be received in a lump sum upon maturity or if the insured dies before the policy matures. If the insured dies before the policy matures, then the beneficiaries mentioned in the policy will receive the lump sum amount along with a bonus, if any. It is an amazing investment avenue available to the people as it provides both, insurance and savings. This policy is also considered low-risk as the insured or the beneficiary (in case of demise of the insured) receives a guaranteed return, known as an endowment, which can be helpful in times of need. The insured decides the amount of premium he wishes to pay and the maturity date of the contract while the policy is in making.
The main features of this policy are as follows:
- Dual feature of life insurance coverage and savings
- Guaranteed return on the maturity of the policy or demise of the insured.
- High returns as it not only provides life insurance coverage but also savings.
- Premium payment frequency and the amount are decided when the policy is in making.
- Flexibility in cover as the insured can add riders.
- Tax Benefits under section 80C of the Income Tax Act.
- Low risk as it provides a guaranteed return if the premiums are paid on time.
Types of Endowment Policy
Now that you know the endowment policy meaning, you should also know about its types, which are as follows:
- Unit Linked Endowment Plan:
In this type of plan, the premium paid is divided into two parts, life insurance coverage, and saving. The savings part is invested in a set of financial securities picked by the insured while entering the plan. This is suitable for people who are looking for avenues with higher returns. This plan carries a certain risk as the returns on the investment will vary as per the performance of the securities.
- Full/with profit Endowment:
In this plan, the insured receives the total sum assured on the maturity of the policy. This amount is guaranteed right from the beginning of the policy. The insured also receives a bonus when the policy matures. In case the owner dies before maturity then the beneficiaries will receive the same.
- Non-profit Endowment:
As the name suggests, this policy is not linked with bonuses. It provides a sum assured after the maturity of the policy or when the insured dies.
- Guaranteed Policy:
Here, the sum assured is guaranteed but the profits are not. Hence, upon maturity of the policy or the demise of the insured, the insured, or its beneficiary will receive the guaranteed sum assured, respectively. This makes this investment risk-free and promises a return upon maturity, which can be used in times of need.
- Low-cost Endowment Plan:
This type of plan is low-cost as mentioned in the name. The reason behind it is that the plan comes with a lock-in period. And the insured can receive the endowment money only after a particular time period. In case the insured dies before this period, the beneficiaries will receive the amount.
Benefits of Endowment Policy
Investing in a life insurance endowment plan has various benefits such as the following:
- Dual function of savings and life insurance coverage: The endowment insurance comes with a dual function of life insurance and savings, thereby offering more service to the investor and helping them to diversify their portfolio.
- Additional Bonus: Many endowment policies offer the insured with bonus. When the company makes a lot of profit then it distributes a part of it to the insurance holders and provides a bonus to the insured/beneficiary at the time of policy maturity or the demise of the insured.
- Option to add riders: This policy comes with the flexibility of adding riders such as accidental death rider, critical illness cover, disability, and others. One can get himself as well as these riders insured which will help during unexpected events.
- Lumpsum payout: A guaranteed payout is offered when the policy matures or the insured dies.
- Tax Benefit: Investing in an endowment assurance will provide you with the option to claim tax exemptions under section 80C of the Income Tax Act.
- Low-risk: Since it provides a lump sum amount at the time of maturity, it is a low-risk investment and good for the long term.
- An endowment Policy is a type of Life Insurance Policy.
- It provides dual functionality of life coverage along with savings.
- It is mainly used for a child’s college savings which come in handy.
- One can avail of tax exemptions under section 80C of the Income Tax Act.
What to consider while buying an Endowment Plan?
One should consider the following points while investing in an endowment assurance policy:
- Having a clear set of goals is very important. Each plan is different and investments should be made wisely. Hence one should invest in an avenue that fits their goals.
- Begin to plan early: Compounding holds a lot of power. If you start early, your returns will be higher due to compounding. You can also start with small amounts which will bring big results in the future.
- Review the flexibility option: A lot of plans offer some kind of flexibility such as adding riders and one should look carefully at what is offered in the plan.
- Having proper knowledge of all options: Gaining proper knowledge of all investment options available is very important to make an informed choice to maximize your returns and achieve your goals.
- Compare policies offered by various companies: One should compare the policies offered by various companies so that they can choose the best option available to them.
- Check the additional riders available: Riders help with insurance coverage and provide more safety at unexpected events. Hence, additional riders will help the insured to stay safer and get higher returns.
- Bonuses offered: One should look for various bonuses that the policy offers when the company earns a good profit and declares a part of it as a bonus to the insurance holders.
- Guaranteed and non-guaranteed returns: One should consider what returns are guaranteed and what are not. The guaranteed returns are the part that the insured or its beneficiary will receive when the policy matures, while the other part is not guaranteed, which is a variable segment of the policy.
Life Insurance is an extremely important investment for every individual. One should not rush into it and consider the above-mentioned points carefully before taking a decision.
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This article has tried to explain the endowment policy meaning and its types and benefits. It has also listed some points to consider while investing in an endowment plan. One should invest in an endowment plan if it matches its goals. Endowment plans are a great way to follow a discipline-saving routine, which will come in handy in the future. It helps the investor with life insurance coverage too, thereby coming of great help when needed the most during an unexpected event. One should plan properly for the future and invest accordingly. It is a great option if someone is looking for a low-risk investment avenue to safeguard the future and get a certain sum amount on a particular date in the future which will be useful for the insured or its family members. This purpose can be anything from a child’s college fees, to an international trip or just to save to stay safe in times of need.
What are the documents required to invest in an endowment policy?
The list of documents required varies from company to company. Although, the majority of them would want the following documents: identity proof, age proof, photograph, filled application form, and address proof.
Are endowment plans tax-free?
No, endowment plans are not completely tax-free. The amount received on maturity is tax-free, which is either received by the insured or by the beneficiary in case the insured is dead. Although, the premium payments are considered for taxation and one can claim tax exemptions under section 80C of the Income Tax Act up to Rs.1,50,000 of total investment.
How is an endowment plan different from a term insurance plan?
In the case of a term insurance plan, the amount is received by the beneficiary only if the insured dies within the maturity period. While in an endowment plan, the insurance amount is provided upon maturity even if the insured is alive. Plus, an endowment plan also contributes a part to savings for the long term.