If you’re a kind of person who likes to buy expensive stuff, just for the sake of buying, and are unable to get rid of this manic purchasing that you are into, then don’t worry. You are not alone. But just in case you are a spendthrift, then endowment life insurance policies are just the thing you need.
What is an endowment policy?
An endowment plan or endowment policy as it is sometimes called is a type of contractual life insurance that is designed to pay a lump sum amount after specified policy term or in case of death of the policyholder. In other words, an endowment policy provides you with both life insurance cover as well as a savings plan. What this means is that the endowment policy helps you save up regularly, so that you get a lump sum amount once that policy matures. Of course, to do that, the policyholder must first survive the full tenure of the policy.
The best endowment policy can mature in either 10, 15 or 20 years, and has a certain age limit, up to which the policyholder can claim it. An endowment life insurance policy helps you secure a happy, retired future by fulfilling all your requirements.
Why you need an endowment policy?
It is obvious that endowment policies have their own set of benefits. To start off with, you can say that these types of policies tend to save a lot for the policyholder, as the policy matures. The policyholder can then choose to either reinvest all those savings or he could just enjoy them post his retirement from service. The policy is a low risk one and gives a fixed amount on a certain date. Of course, this is after the premium amount has been paid.
The policyholder is free to use this money as per his requirements. He could use it for his child’s education or may spend it on a much-deserved vacation.
With that said, endowment plans offer three major kinds of benefits.
- Maturity benefits
Maturity benefits are nothing but the lump sum amount received by the policyholder, right after the policy matures. In other words, what amount the policyholder gets, once the term of the policy ends is the maturity benefit.
- Death benefits
In case of accidental death of the policyholder, the family of the policyholder is eligible to receive an amount of money that is equivalent to how much the life insurance policy covers. This amount is the death benefit.
- Tax benefits
The Indian Income Tax laws allow a person to reduce his taxable income by several methods. One of the most popular ones is through endowment policies. The premiums you pay for the policy help you do just that, and the term used for the very purpose is known as tax savings or tax benefits.
Types of endowment plans
Endowment plans come in different types.
- The unit linked endowment plans
Under this type of endowment plans, the premiums the policyholder must pay are classified into different units, which come under a specific investment fund. These units can be used to cover for the cost of the life insurance. In this type of endowment plan, the policyholders have the option to choose where and in what proportion their premiums would be invested.
The prices of the units are published regularly. The current value of the unit is the value at which the policy can be encashed.
- Full profit endowment plans
This plan provides the policyholder the basic amount or the sum assured, which is a guarantee given right at the beginning of the policy. However, there are certain bonuses that are announced by the company, from time to time, which is paid as the final amount, and is higher as compared to other policies of similar nature, depending on how much bonus you get.
Just as in other endowment policies, there are death benefits in this endowment plan as well. The only difference is that even the bonuses are paid as part of the maturity amount of the policy.
- Low-cost endowment plans
This type of endowment policy lets the policyholder gather the funds for up to a specified period, after which the policyholder is paid, and is usually in the form of mortgages. In this type of policy, a future growth is first estimated, based on which, a target amount to be paid is set. In case of the death of the policyholder, this target amount is paid out as a minimum sum assured.
- Non-profit endowment plans
In these types of endowment plans, the profits made by the company, that is, the bonuses are not paid as part of the policy. However, there are certain additional guarantees, which help ensure minimum returns to the policyholder.
- Traditional with profit endowment plans
Based on the kind of investments made, the sum assured can be increased manifold with the help of additional, periodic bonuses. In addition to the bonuses paid at the time of maturity, which are regular or revisionary bonuses, which are paid at the end of the term, and are called as terminal bonuses. These, however, are not guaranteed.
- Traded endowment plans
These are second-hand endowment policies, which are sold to a new investor when part of their terms is done with. These are typically your traditional with profit endowment plans that enable those kinds of investors who want to buy endowment policies that they are not in need of. These policies are offered to those kinds of buyers for a surrender value that is more than that offered by the insurance company.
The reason that the new investors pay more than the surrender value is that the value of the policy increases when it is enforced, rather than when it is terminated. The policy when in the hands of the new owner, grants him with full responsibility of paying the remaining or existing premiums, and allows him to get the maturity value of the policy as well. Or perhaps the death benefits, if there is any, in case of death of the original owner.
As for the original owner, he can no longer claim the benefits of the policy. However, one of the easiest ways to determine whether a said endowment policy falls into this category or not checks if the policy is unitized or not. That is, to see whether the policy is a unit linked policy or not.
Key features of endowment plans
Endowment plans that have terms of more than 15 or 20 years are generally more profitable than the ones that have shorter terms. This is because, you can manage to gather more money over a large tenure, which can then be used as funding for large expenses if any, in the future.
Not only do endowment plans give higher returns, but they also have an array of benefits such as tax savings and premium waivers. All these features make endowment plans one of the best possible life insurance plans out there.
- Death and survival benefits
In case the policyholder dies due to an unfortunate event, then the one who is nominated to claim the benefits of the policy gets the sum assured and any other bonuses that come along with it. Also, in case the insured person can outlive the policy, then he or she gets the sum assured.
- Higher returns
Endowment policies are great when it comes to building a corpus and securing the financial needs of yourself as well as your family. As such, endowment policies are known to give out higher returns and added benefits as compared to pure life insurance policies.
- The frequency of premium payments
Endowment policies allow the policyholder to pay the premiums as per the requirements of the policy he or she has chosen. Endowment plans allow for monthly, quarterly, half-yearly or yearly payments of premium.
- Covers are flexible
The base plan can be topped with additional rider benefits such as any critical illnesses, permanent disability, or death by accident. Also, a few plans even offer other additional benefits such as premium waivers on total permanent disability or critical illness, among others.
- Avail tax benefits and savings
The policyholder can avail tax benefits on premium payments as well as maturity and final payouts as per Sections 80C and 10D of the Indian Income Tax Act of 1961.
- Not too many risks involved
Endowment policies are a much safer option compared to other options of investments or other insurance policies, including mutual funds or ULIPs. This is because these funds do not directly involve equity funds or even the stock market.
Optional benefits of endowment plans
Endowment plans have a host of optional benefits that can be availed as riders. These include things such as critical illness or permanent disability, death by accident, premium waiver and hospital cash benefit. The hospital cash benefit allows the policyholder to provide for daily hospitalization expenses, in case the policyholder is hospitalized, as well as avail benefits post-hospitalization.
Choosing an endowment policy
With the market having tons of endowment policies, and with the coming of newer policies into the picture, it’s no wonder that it’s so hard for a person to choose one that is best suited for him. However, there are quite a few factors which help a person to decide what’s best for him or her, as far as endowment plans or policies are concerned.
- Income of the said individual
As with buying anything, buying an endowment policy can also sometimes depend heavily on the income of the said policy buyer.
- The policy buyer’s current life stage
This is one other important deciding factor for buying an endowment policy. There are certain critical stages in one’s life, such as the birth of their child, child’s education, child’s marriage or even their own marriage. One needs to save up for these events. So, investing in the right policy at the right time leads to a healthier financial future for the said individual.
Also, the policy buyer’s current life stage is one of the deciding factors as to what he or she must save for, and thus, buy the suitable policy accordingly.
- The policy holder’s willingness to take risks
As with other insurance policies, endowment policies to come with their own set of risks and drawbacks. So, the policy buyer must be sure of the amount of risk he or she is willing to take so that there are no further consequences which cannot be bored.
- The cost of the premium
Premiums of endowment plans tend to be more expensive than regular life insurance plans. So, one should also bear in mind the cost of the premium when considering buying an endowment policy.
Besides these, there are also some other factors that play a vital role in buying an endowment plan. These include things such as the track record of the insurance company you opt for. This is essentially knowing how good or bad the insurance company really is. This could be in the form of the bonuses the company offers or even the kind of customer service it provides.
But it is not just limited to those, and can also include things such as their ratio of claim settlement, the insurance company or insurer’s financial position, etc.
To put it simply, a policy buyer should not buy an insurance policy that comes with terms and conditions that he or she cannot comprehend. However, there are some things that all endowment plans have in common, including things such as the surrender value. The surrender value will usually be lower than the total premium you pay in the initial years of the policy term.
But the policyholder can only be eligible to get this sum of money if he or she has paid the premium for a minimum of two years. Nonetheless, since this sum of money is usually lower than the total premium paid, it doesn’t have many benefits for the policyholder, as he or she will receive only a partial amount as compensation.