Every year lakhs of people die in road accidents in India. In 2022, approximately 1.5 lakh such deaths were recorded in India6. Life insurance may be essential to have a financial security to deal with such unforeseen circumstances.
Keeping an insurance policy active requires you to pay the premiums on time. But you also have other goals for which you need to set aside a portion of the monthly income as savings. How do you balance between savings and insurance? One option you may consider is to invest in an endowment plan.
What is an Endowment Plan?
An endowment plan is an insurance plan that provides the benefit of insurance as well as savings. Any insurance policy that offers death benefit along with providing with a maturity benefit can be termed an endowment plan. The policyholder receives a pay-out at maturity, but if life assured dies during the policy term, the nominee is paid the sum assured. An endowment plan can be unit-linked or non-linked.
Primarily endowment policies are of seven types —
- Pure Endowment Plans
- Whole Life Endowment Plans
- Child-Oriented Endowment Plans
- Money Back Plans
- Unit-Linked Endowment Plans
- Participating Endowment Plans
- Non-Participating Endowment Plans
These will be explained in detail later in the article.
How Does It Work?
Endowment policies could be a part of every investment portfolio. Endowment plans ensure life insurance coverage, just like other insurance products, and also help you accumulate funds that are paid at maturity. If the insured passes away during the policy tenure, the nominee gets the sum assured. On the other hand, if the insured survives the policy term, he/she is paid a lump-sum amount at maturity. The maturity benefit can be utilised to meet life goals such as children’s marriage or retirement.
What are Its Features and Benefits?
1. Dual benefits
An insurance plan ensures the financial stability of the family in case of an unfortunate incident. But along with the insurance cover, it also offers a savings component which helps in creating wealth for the future. An endowment policy essentially provides both death and maturity benefits.
2. Higher Returns
An endowment policy is not the only life insurance plan that pays maturity benefits. Products like term plans with return of premium also pay benefit at maturity which is equal to the total premium paid by the customer under the policy. In case of an endowment plan, there is a return on the premium on account of the return from the market linked funds in case of ULIP or Bonus in case of Participating plans or the guaranteed* benefit in case of a Non-participating plan
Insurance plans may offer certain flexibilities like the premiums which can be paid on a monthly, quarterly, half-yearly or annual basis. Certain plans can have additional features like riders for accidental death, accidental total and partial disability and critical illness etc. Some plans also have premium waiver options for disability and critical illness.
4. Tax Benefits
Endowment plans also provide tax benefits. The premiums paid for the policy are eligible for tax deduction under Section 80C of the Income Tax Act, 1961 (the Act) under old tax regime. Additionally, the pay-out received from the policy is exempt from taxes under Section 10 (10D) of the Act. Tax benefits are subject to provisions of the Act, as amended from time to time.
5. Long-Term Savings
An endowment policy is a long-term product. Through the policy, you can save and build wealth systematically over the long term. It inculcates a habit of savings and depending on the type of the policy, the savings grow over a period of time.
Different Types of Endowment Policies:
Different types of endowment policies are available in the market. You can choose one depending on your needs. Here’s a look at some of the common types of endowment plans –
1. Pure Endowment Plans:
These plans are simple endowment plans which aim to create a corpus for your financial goals. You get an assured* benefit on premature demise during the policy tenure and on maturity if you survive the policy tenure.
2. Whole Life Endowment Plans¹:
These endowment plans allow coverage for your whole life, i.e., till 99 or 100 years of age. These plans are a combination of endowment along with whole life.
In the case of premature demise, the death benefit is paid. On the other hand, if the life insured survives the policy tenure and the plan matures, a maturity benefit is paid.
3. Child-Oriented Endowment Plans²:
These plans are specifically designed to create a corpus for the child’s future. They might have an inbuilt premium waiver benefit. This benefit waives the premium if the parent passes away during the policy tenure. The policy, however, continues unaffected, and the insurance company pays the premium on the parent’s behalf. On maturity, the maturity benefit is paid.
4. Money Back Plans³:
This is called an anticipated endowment plan, wherein a scheduled amount of money is paid to the policyholder in a predefined time as a survival benefit. This is paid in installments, and the remaining amount of the sum assured is paid at the end of the policy tenure as a maturity benefit.
5. Unit-Linked Endowment Plans
When you opt for unit-linked endowment plans, the premium paid is invested in different market linked funds of your choice thereby earning you market linked returns.
6. Participating Endowment Plans:
Participating endowment plans are those that earn bonus additions during the policy tenure according to the profit of the insurer. These bonus additions accumulate over the tenure and enhance the death benefit or maturity benefits payable.
7. Non-Participating Endowment Plans:
These types of endowment plans do not earn bonuses.
Factors to Consider Before Buying One
It is important to understand every detail of an endowment policy before investing in it. Though it is a life insurance plan, it is used as a tool for long-term savings. One should take into consideration several factors before buying an endowment policy.
1. Plan Early
Endowment policies are long-term commitments and it is critical to start early to get the maximum benefits. Endowment plans are designed to accumulate wealth over several years. Starting early boosts the final corpus as the power of compounding works over the long-term. The power of compounding reinvests the profit earned to grow your wealth exponentially.
One of the prominent features of an insurance plan is the flexibility it offers. While buying a policy, it is necessary to evaluate the level of flexibility offered by different insurance companies. One should ascertain the premium payment terms before investing. Salaried employees can utilize regular premium payment options, while people with irregular income can avail single premium payment option.
3. Know The Type of Plan
Number of endowment plans are available in the market. Before buying a plan, it is extremely important to understand your needs, risk appetite and then opt for a policy. One should be aware of the type of plan he/she is signing for.
One can choose to enhance the insurance coverage of an endowment policy by adding riders if the feature is available under the plan. You can choose a critical illness rider or an accidental death rider, among others. Please note that riders can be opted on payment of nominal additional premium. Choose a policy that offers a wide variety of riders so that you can customize it as per your requirements.
Steps to Buy One Online
An endowment insurance plan ensures that your family remains financially stable even in your absence. To ensure their safety, it is important to purchase the plan from a credible insurer. With the digitization of services and products, a number of companies have such plans available on their corporate websites.
The process to buy an endowment policy online is convenient and simple.
Step 1. Visit the website of the insurer chosen by you and go to the plans sections.
Step 2. Choose the plan.
Step 3. You will be asked to provide some basic details like name, gender, date of birth, phone number, pin code etc. The information will be used to generate a quote.
Step 4. Once the quote is generated, you can choose to make the payment online.
Step 5. After the completion of the payment, one has to fill the proposal form. At this stage, you have to submit the required documents like age proof, residential proof and photograph.
Step 6. All the documents can be submitted online through the website. After the verification of the documents as per the underwriting guidelines of the company, the policy would be issued.
All companies have different buy processes, hence it is best to go through the website thoroughly and follow the steps. You can also opt in for a service where you just drop in your contact details, and the company representative will get in touch with you and help you with the online buy journey.
Who Should Buy an Endowment Plan?
An endowment plan is a suitable choice if you are looking to create a safe corpus for your financial goals. It does not face market volatility giving assured* returns on premature demise or maturity. The endowment plan is suitable for the following types of policyholders –
- Those who are looking to create a secured corpus for their financial goals.
- Those who don’t want to face volatility risks.
- Those who want to enjoy insurance coverage plus assured* benefits.
If your investment need and financial goals align with an endowment plan, you can choose a suitable plan and enjoy its benefits.
Claim Process of Endowment Plans:
In an endowment plan, there can be a death claim or a maturity claim. the process for these claims is as follows –
1. Death Claim
In case of a death claim, the nominee or the legal heirs, as the case may be, of the life insured have to notify the insurance company of the insured’s death. The process is as follows –
- The insurance company is informed of the life insured’s demise.
- The claim form should be filled out and submitted with a list of claim-related documents.
- The insurance company assesses and verifies the claim form and the attached documents.
- Upon successful verification, the death claim is paid.
The documents required to process a death claim usually involve the following –
- Claim form, filled and signed by the claimant
- Original Policy document
- Death certificate
- NEFT mandate form attested by bank authorities or copy of cancelled cheque or bank account passbook
- Nominee's photo identity & address proof such as copy of Passport, Voter identity card, Aadhaar (UID) card, etc.
- Medical or hospital records in the case of sickness or illness-related deaths
- Police FIR, medico-legal certificate, panchnama, inquest report, post-mortem report, etc., in the case of accidental deaths.
- Claimant’s ID proof and bank details
2. Maturity Benefit
At the end of the policy tenure, endowment plans offer a fixed maturity amount. This amount is fixed at the time of policy purchase and remains unaffected by market fluctuations
Along with being an efficient savings tool, an endowment plan also provides a life insurance cover. The benefits of investing in endowment plans are innumerable.
1. When is the right time to buy an endowment policy?
There is no right time. The earlier you buy, the better. This would allow you to get affordable premiums, create a good corpus over time, enjoy insurance protection and also save taxes.
2. Do endowment plans offer a life cover?
Yes, endowment plans offer life insurance coverage during the policy tenure.
3. How many times can you change the nominee of an endowment plan?
You can change the nominee in your life insurance policy as many times as you want. You just have to effect the change through an endorsement of the policy.
4. What is the tenure of an endowment policy?
The tenure of an endowment policy depends on the policy that you choose. It can start from as low as 5 years and run till 99 or 100 years of age, in case of whole life insurance policy.
5. Can I receive a bonus along with the Sum Assured when the endowment policy matures?
If you choose the participating endowment insurance policy, you may earn a bonus (if declared by the insurance company) during the policy tenure if you pay the premiums duly. This accumulated bonus will be paid with the sum assured on maturity. Bonus declaration and payment is at the sole discretion of the Insurance Company.
6. Who should buy an endowment plan?
Any individual who needs to create a secured corpus for his financial goal needs insurance protection and who wants to avoid market volatility can buy an endowment plan. However, individuals should align the plan with their financial goals and need when buying it.
3. https://www.insuranceinstituteofindia.com/downloads/IC38/ALEnglish.pdf (Page 147)