Life insurance policies are designed to cover the financial risks that arise in the case of a premature demise. However, there are other aspects of life insurance policies that help in the fulfilment of financial goals. Life insurance plans come in different variants, and if you choose savings-oriented policies, you will be able to create a corpus as well as enjoy life insurance protection.
Endowment insurance plans are type of savings-oriented life insurance plan that help you create a secured financial corpus for your goals and also provides life insurance coverage. Let’s understand endowment plans in detail –
What are Endowment Plans?
Also called traditional savings plans, endowment plans are non-linked policies that do not invest your premium in the financial markets. Instead, these plans offer a secured corpus on premature demise or maturity1.
Features of Endowment Plans
Some of the salient features of endowment plans are as follows –
1. Assured Benefits
Endowment plans pay assured benefits on premature demise or maturity. The plan specifies the benefits when you buy it. As such, those of you looking for a plan that is not exposed to market risks can opt for the endowment policy.
2. Participating and Non-Participating Plans
Endowment plans are offered as two main types – participating or with profits plans and non-participating or without profit plans. Let’s understand what each of these plans means –
▪ Participating Endowment Plans
Participating endowment plans are those that participate in the profits of the insurance company. If, in a financial year, the insurance company earns profits, a part of the same may be distributed among the policyholders, at the sole discretion of the insurance company, in the form of a bonus.
▪ Non-Participating Endowment Plans
In a non-participating endowment plans, the policyholder does not participate in the profits of the life insurance provider. However, there are death benefits and maturity benefits.
3. Different Types for Different Goals
Besides participating and non-participating endowment plans, you can segregate these plans based on your financial goals too. Have a look at some of them –
▪ Child Insurance Plans
Under such endowment plans, you can create a secured savings corpus for your child’s future needs. Some child plans come with a premium waiver benefit, wherein the future premiums are waived off if the parent passes away during the policy tenure.
▪ Whole Life Plans
Under whole life plans, coverage is allowed till 99 or 100 years of age. On death during the tenure, the death benefit is paid, while on maturity, the maturity benefit is paid under some plans, subject to policy terms & conditions.
▪ Money-Back Plans
Money back plans are endowment plans but with a difference. Under these plans, a part of the sum assured is paid regularly during the policy tenure. On maturity, the remaining sum assured is paid, while on death, the full benefit is paid irrespective of the money back benefits already received.
4. Additions Under the Plan
Endowment plans can offer different types of additions to enhance the corpus. These include loyalty additions, wealth boosters, etc. subject to the terms & of the policy.
5. Benefit Payout Options
Under some endowment plans, you get the option to receive the death and/or maturity benefit in instalments rather than in a lump sum. This helps you create a regular stream of income for your financial needs.
6. Premium Payment and Policy Tenure
The policy tenure under endowment plans usually starts from 5 years and can go upto 99 or 100 years of age (under whole-life plans). When it comes to premium payments, you might find flexible options like the following –
- Regular premiums – premiums payable throughout the chosen policy tenure
- Limited premiums – premiums payable for a limited tenure
- Single premium – premium paid at once when buying the policy
7. Policy Loan
Being savings-oriented, endowment plans may allow the facility of loans under the policy. You can get a loan against the surrender value and meet your financial needs. The loan, however, carries an interest rate, and non-payment of the loan might result in foreclosure2 of the policy wherein the coverage is terminated.
8. Tax Benefits
Lastly, endowment plans also have a tax advantage. Here are the tax benefits that you can claim –
- Premium paid for the endowment plan is allowed as a deduction under Section 80C of the Income Tax Act, 1961. Above Tax benefits are available only if Old regime of Taxation is opted. The limit of deduction is Rs.1.5 lakhs with the following conditions –
- If you bought the policy on or before 31st March 2012, a premium of up to 20%3 of the sum assured is allowed as a deduction.
- If you bought the policy on or after 1st April 2012, a premium of up to 10%3 of the sum assured is allowed as a deduction.
- If you bought the policy on or after 1st April 2013 and you suffer from a disability defined under Section 80U or an ailment defined under Section 80DB, a premium of up to 15%3 of the sum assured is allowed as a deduction.
- The death benefit received from the policy is always tax-free4.
- The maturity benefit received is also tax-free under Section 10(10D)4 provided the premium is 20% / 10% / 15% of the sum assured, as mentioned earlier.
Further, any non-linked policy/policies issued on or after 1 April 2023 with annual premium payable of more than Rs. 5 lakhs (excluding GST), proceeds from such policies will be taxable and income from such policies will be treated as “Income from Other Sources”. If the annual premium is less than Rs. 5 lakhs, income from such policy will continue to be tax free in the hands of policyholder subject to satisfaction of Section 10(10D) of Income Tax Act, 1961 conditions.
There is no change in tax treatment for existing policies issued before April 1, 2023. For such polices, if the total premium is more than 5 lakhs, a policyholder is entitled to get all the erstwhile tax benefits, and maturity / surrender /Income benefit proceeds from them will remain tax-free provided the other conditions under Section 10(10D) are satisfied.
So, understand what endowment plans are all about and their important aspects. You may buy these plans to create a secured financial corpus for the different financial goals that you might have and also save tax in the process.
Reference
1. https://www.insuranceinstituteofindia.com/downloads/IC38/ALEnglish.pdf (Page 146)
2. https://www.insuranceinstituteofindia.com/downloads/IC38/ALEnglish.pdf (Page 252)
3. https://incometaxindia.gov.in/tutorials/20.%20tax%20benefits%20due%20to%20health%20insurance.pdf
4. https://www.livemint.com/money/personal-finance/how-life-insurance-policies-are-taxed-11665145664260.html
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