Are you someone who regularly buys expensive stuff just for the sake of shopping? If you are unable to cure this habit and bring yourself to save money for the future, then endowment insurance might be just the right thing for you. Endowment policies provide an option of insuring yourself up for the duration of a time period of your wish. In case of your demise in the policy term, a designated nominee will receive the assured sum plus bonus. If you outlive the policy term, then you would receive the maturity amount upon completion of the policy term. Keep reading to find out more about endowment policies and how they work.
What is Endowment Policy?
An endowment policy is an investment product offered by life insurance companies. It is a regular savings plan and at the end of a certain period, you receive a lump sum amount upon policy maturity. The endowment policy has life insurance included as well, so it will payout in the unfortunate case of your death too.
Features of Endowment Plan:
- Dual coverage: The beneficiary /nominee of the policy will get the assured sum along with bonuses in case of the demise of the policyholder. Apart from that, the insured will receive the assured sum if he outlives the policy period.
- High Returns: The endowment policy helps you in building a corpus for the future and also in giving financial protection to your family. The payout for the survival benefit and the death benefit of the endowment plan is higher than the traditional life insurance policy, i.e. Term Plans.
- Frequency of Premium Payment: The policyholder will make payment of his premium based on the chosen policy. This payment can be done on a monthly, quarterly, half-yearly or even yearly basis.
- Cover Flexibility: Conditions like critical illness, total permanent disability or accidental death can be added to the base plan. This way ensures Enhancement of the life cover. Besides, there are certain plans which offer waiver in the premium payment due to total permanent disability or critical illnesses.
- Benefits on Tax: The policyholder will receive a tax exemption on both the premium payments, maturity, and the final payouts as well.
- Low Risk: The traditional endowment policies are safe as compared to the other policy options like Mutual Funds or the ULIP’s because the sum here does not get directly invested in the stock market or equity funds.
Types of Endowment Plans:
- Unit Linked Endowment Plan: Here the insurance premiums are divided into multiple units under a specific investment fund that needs to be chosen by the policy holder.
- Full/With Profit Endowment: In this plan, the sum assured will be given to the policy holder, i.e., the sum assured is guaranteed right from the start of your policy. The final payout provided is comparatively higher depending on the bonuses applicable at a certain point of time. These bonuses once declared as the policy’s part, have to be paid out if the policy holder dies or upon the maturity of the policy.
- Low-Cost Endowment: This type of plan was structured with the target of allowing the investor to collect the funds needed to be paid after a stipulated period, generally after the mortgage period.
- Non-profit Endowment: These are endowment plans which don’t take part in the profits or bonuses generated by the company. Companies guarantee additions in these plans to help in generating returns.
Best Endowment Policies in India 2020:
- HDFC Life Sampoorn Samriddhi Plus
- Reliance Nippon Life Super Endowment Plan
- SBI Life Smart Bachat
- Reliance Life Insurance Super Endowment Policy
- Kotak Classic Endowment Policy
- LIC New Endowment Policy
- HDFC Life Endowment Assurance Policy
- SBI Life Endowment Policy
- Reliance Endowment Policy
- Kotak Premium Endowment Policy
- Aviva Dhan Nirman Endowment Policy
- Bajaj Allianz Endowment Policy
- AEGON Life Premium Endowment Policy
- IDBI Federal Endowment Policy
Endowment Policies Benefits
- These are low-risk plans to invest in as the maturity benefits are guaranteed. Coverage for accidents, terminal illness, education expenses and other riders can be included in the endowment policy.
- The policy will provide financial security to your loved ones.
- You will be able to receive tax exemption up to a certain level.
- Additional Bonus: There are different types of bonuses declared by an insurance company on your policy. Broadly, they are of two types:
- Reversionary Bonus: It is the additional money added to the amount payable on death or upon maturity of with-profits policy. Once made, it cannot be withdrawn if the policy reaches maturity or in case of the demise of the insured.
- Terminal Bonus: This is a discretional additional amount of money added to the maturity amount of an insurance policy or the sum payable in case of death of the insured person.
- Maturity Benefits: Upon outliving the policy term, the insured will receive the assured sum plus bonus for the term of the policy. This amount is exempted from tax.
How do endowment policies work?
- You need to make monthly, quarterly or annual premium payments.
- A part of your payment will be used to buy life insurance and the amount involved in that depends on your age, sex and period of your endowment policy.
- The rest of the payment will be invested either in a with-profits method or in a unit-linked way. The size of the maturity amount often depends on how well those investments perform.
How your money is invested?
Your money could be invested on a with-profits basis. What this means is that your money is invested with other investors’ money in different investments like in:
- Fixed-interest investments.
Now, this pool would be used to meet the expenses involved in running the insurer’s business and then the leftover part (profits) are shared with the investors by declaring them as bonuses which would increase the value of your plan.
Else, you could choose those policies where the investment is made on a unit-linked basis. Then, it will be up to you to decide how you want to invest your money, by choosing from different investment option.
These could be funds run by the insurance company or there could be a range of unit trusts and open-ended investment companies (OEICs) as well run by separate companies. You could also choose to switch between different funds, if you wish to, without having to cash in your policy. First and second switches will be free but there could be charges if the switch is made more often.
Access to your invested money
- Your money will not be accessible until the end of the policy term.
- If you end your policy early then you would have to pay high charges and penalties.
- There could be an administration fee deducted from each of your periodic payments.
- If you want to invest on a with-profits basis, different costs and charges will be deducted from your investment fund before the bonuses are worked out. Ask the company for a guide to explain how these bonuses work out.
- If you invest on a unit-linked basis, then there would be a range of different charges deducted from each fund.
- Endowment Policies are long term investments and you would have to pay charges and penalties to get out early.
Why should you buy an Endowment Policy?
These policies provide you a disciplined way of saving money for your future needs. Apart from that, they also provide life risk coverage, which would cater for your family if you happen to undergo an untimely death during the policy period. You will also be able to avail tax benefits subject to certain conditions. In case, you survive the policy term, you would receive the promised maturity amount.
What to look for before buying an Endowment Policy?
You should always go through the following things before investing in an endowment policy:
- Plan Early: If the insured makes investments at an early age, then they can enjoy a long horizon to keep investing. Hence, the insured will be able to build a huge corpus over time. This, in turn, would ensure disciplined savings and also ensures better returns because of the power of compounding.
- Flexibility: If the investor is a salaried person then they might choose a regular payment policy. They also have single payment options for people with irregular incomes. Hence, there are many flexible options to support various kinds of lifestyles. .
- Know the types of policies: You need to make regular payments in an endowment plan. You should go through the types of endowment policies available to be able to choose the right one for you (either a non-profit basis plan or a profit basis one).
- Plan with Riders: Many companies offer riders over your endowment policy like education, endowment, double endowment policy, marriage endowment policy, critical illness cover, etc. You should choose a policy with suitable riders.
- Returns: Many endowment policies provide a combination of guaranteed and non-guaranteed returns. Compare companies’ track records on this basis to reach a decision.
- Bonuses: Try to choose a policy that would return maximum bonuses. Look into the company’s history to get an idea of how well they perform in this field and so on.
Documents Required for Endowment Policy Application
You need the following documents to apply for an endowment policy:
- Proof of Age
- Proof of residence
- Duly filled Application form