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What are the Benefits of Endowment Policy?

Endowment policies provide dual benefits of life insurance coverage and disciplined savings, offering a lump sum payout on maturity or death, along with potential bonuses and tax benefits.

  • 12,304 Views | Updated on: Jul 04, 2024

An endowment policy is a life insurance contract that combines the benefits of insurance protection and savings. These policies are designed to provide a lump sum amount either on maturity or on the death of the policyholder, whichever comes first.

Conventional insurance plans work by the rule: pay the premium and get compensated for the loss incurred; if everything goes well, the premium is null after that covered period. But an endowment plan is not just about covering losses. Let us explore the advantages of endowment policy.

Benefits of Endowment policy

There are various benefits of endowment policy. The most prominent endowment policy benefits are listed here:

Guaranteed returns

Endowment policies offer guaranteed returns on the investment amount, ensuring that the policyholder receives a lump sum at the end of the policy term.

Life cover

Endowment policies offer life cover to the policyholder, ensuring that their family is financially protected in case of their untimely demise.

Maturity benefits

Upon the completion of the policy term, the policyholder receives a lump sum of money that can be used to achieve long-term financial goals such as buying a house, funding their children’s education, or planning for their retirement.

Tax Benefit

A double endowment policy provides risk coverage for life while also being a good investment plan. If any mishap occurs, the nominee gets the sum assured. At the end of the stipulated term, the policyholder receives the maturity benefit, the sum assured, and other bonuses (depending upon the plan you opt for).

Insurance-cum-Investment

One of the best endowment policy benefits is the tax exemption it brings. You can claim the tax exemption under Section 80C for the premium paid, and the sum assured received is tax-free under Section 10 (10D). Hence, it is a win-win situation.

Liquidity

An insurance cover, an investment plan, and in case of any emergency, you can ask your insurance company to foreclose the policy. You will get the sum, interest, and bonuses until that time. It is one of the most liquid table policy types present out there.

Compounded Returns

A double endowment policy returns are paid with the sum assured; therefore, the generated returns are compounded repeatedly, ultimately giving you hefty returns. These returns are tax-free under Section 10 (10D) of the Income Tax Act as they are part of the sum assured.

Riders’ Benefits

You can add multiple insurance riders for a fractional amount if you wish to add further facilities to your endowment policies. Depending on your insurance company, these riders can cover your health, accidental coverage, double endowment policy, and much more. These are some of the most popular benefits of an endowment policy, and you are suggested to apply suitable riders to your policy.

Loan Against Endowment Policy

Like any other asset, like your house, securities, or stocks, you can take out loans or bank limits against your endowment policy without disturbing its returns or benefits.

Low-Risk Investment Plan

Apart from covering the risk of our lives, the endowment policy benefits include a low-risk involvement. Instead, we could call it one of the safest investment options available as the Insurance companies are governed by strict laws to be followed. It is rated as safe as a Fixed Deposit with the bank with much better returns than the former.

How Does Endowment Life Insurance Work?

Endowment life insurance is a type of policy that combines life coverage with a savings plan, providing both a death benefit and a maturity benefit. Here’s a detailed breakdown of endowment life insurance, covering the key aspects you must consider.

Deciding the Policy

When deciding on an endowment life insurance policy, you must assess your financial goals and risk appetite. This type of insurance suits individuals looking to combine protection with savings. You must choose the policy term, sum assured (the amount your beneficiaries receive upon your death), and the premium payment frequency. Evaluating different policies and providers is important to ensure that the chosen policy aligns with your long-term financial plans.

Paying Premiums

Premiums for endowment life insurance are typically higher than those for term insurance because they include a savings component. Depending on the policy terms, premiums can be paid monthly, quarterly, semi-annually, or annually. Consistent premium payment is crucial to keeping the policy active and building up the savings component. Some policies may offer limited premium payment terms, where you pay premiums for a specified period, but the coverage continues until the policy matures.

Accruing Bonuses

One of the attractive features of endowment life insurance is the potential to accrue bonuses. The insurance company typically declares these bonuses annually based on performance and profits. Bonuses can be reversionary, meaning they are added to the sum assured and paid out at maturity or death, or they can be paid out as a lump sum. These bonuses enhance the policy’s overall value and can boost the maturity or death benefit.

Maturity Benefits

The maturity benefit is the lump sum paid out at the end of the policy term if the policyholder survives. This benefit includes the sum assured plus any accrued bonuses. The maturity benefit can be used for various purposes, such as retirement planning, children’s education, or other financial goals. This feature makes endowment life insurance an attractive savings tool, ensuring a guaranteed payout after a specific period.

Death Benefits

In the unfortunate event of the policyholder’s death during the policy term, the death benefit is paid to the beneficiaries. This benefit typically includes the sum assured and any accrued bonuses up to the date of death. The death benefit ensures financial security for the policyholder’s family, helping them manage expenses and maintain their standard of living.

Surrender Benefits

If you need to access funds before the policy term ends, you can surrender your endowment policy. The surrender benefit is the amount paid to you if you decide to terminate the policy prematurely. This amount is usually less than the total premiums paid and depends on the policy’s surrender value, which increases over time. However, surrendering a policy early often results in financial loss, making it less desirable unless absolutely necessary.

Limitations of Endowment Life Insurance Plans

While endowment life insurance offers several benefits, it also has some limitations that potential policyholders should consider.

Lower Rate of Return

Endowment life insurance generally provides a lower rate of return than other investment options like mutual funds or stocks. Insurance companies’ conservative investment strategy and including life cover and bonuses limit the potential for higher returns. Balancing insurance with the desire for significant growth in your investments is essential.

Longer Lock-in Period

Endowment policies have a longer lock-in period, often 10 to 20 years. This means your funds are tied up for an extended period, and early withdrawal or surrender can result in penalties or reduced benefits. This lack of liquidity can be a disadvantage if you need access to your savings before the policy matures.

Higher Premiums

Endowment life insurance premiums are higher than term insurance because of the savings component. For the same amount of life coverage, you will pay more premiums for an endowment policy. This higher cost can be a burden if you have a tight budget or prefer to allocate funds to other investments.

Lower Flexibility of Premium Payments

Endowment policies often require fixed premium payments at regular intervals. While some policies offer limited premium payment options, the lack of flexibility can constrain those with variable incomes or financial uncertainties. Missing premium payments can lead to policy lapse or reduced benefits.

Insufficient Coverage

Endowment life insurance might not provide adequate life cover compared to pure-term insurance policies. Since a portion of the premium goes towards savings, the sum assured might be lower than needed to cover substantial financial obligations like mortgages or long-term family support. Evaluating whether the policy provides sufficient coverage to meet your dependents’ needs in your absence is crucial.

Why Choose an Endowment Policy?

The most popular type of insurance is life insurance, under which we pay after a specific interval (monthly, quarterly, yearly) to cover our life, and the sum assured is paid to the nominee in case of the insured’s demise during this covered tenure.

But what if the individual stays fit and fine and leads a good life till maturity? Will the premium paid by them to the insurance company be of no use then?

Like any other insurance policy, an endowment plan covers your life and provides good returns on the premium paid. In case of any mishap, the nominee will be paid the sum assured. However, if everything goes fine, you will get a good return on the premium paid. Hence, an endowment plan covers your life and provides good returns on the premium paid. What could be better than that?

How to Choose the Right Endowment Policy?

An endowment policy offers life insurance coverage and acts as a disciplined savings plan, providing a lump sum payout on maturity or in case of the policyholder’s death. Here is how you can make an informed decision when selecting the right endowment policy.

Opt to Pay Premiums as per Your Saving Capabilities

Individuals with a consistent source of income can choose the regular premium payment endowment insurance, whilst those with sporadic income can choose the single premium option. Choose an endowment plan that gives you plenty of options for how long you want to pay your premiums and how frequently you want to pay them.

Company Credentials

Check the following company credentials when choosing the right agency to invest with:

Claim Settlement Ratio

An insurer’s claim settlement ratio is the number of claims settled divided by the number of claims filed: the greater the ratio, the better the insurer.

Solvency Ratio

A life insurance provider with a high solvency ratio is more likely to be financially secure and, as a result, better equipped to pay out your insurance claims and exist for an extended period of time. The greater the ratio, the better its ability to settle claims.

Customer Centricity

A corporation’s commitment to service quality should be prioritized. You, the customer, should always be at the centre of the company’s activities and treated with empathy and understanding.

Digital Strength

Access to online tools at the touch of a button will offer a convenient and hassle-free customer experience, whether you are acquiring insurance, paying a premium, renewing the policy, resolving a complaint, or settling claims.

Rider Benefits

With an endowment policy, you can also choose additional advantages in the form of riders. You can choose an endowment plan to protect yourself against unpleasant situations such as accidental death, disability, and so on, and therefore enhance your insurance coverage.

Key Takeaways

  • An endowment policy combines life insurance coverage with a savings plan.
  • The benefits of endowment plans include a substantial maturity benefit at the end of the policy term.
  • It ensures financial protection for your family in case of untimely death.
  • It encourages systematic saving through regular premium payments.
  • It participates in the insurer’s profits, enhancing final payouts with bonuses.

Conclusion

Now that you know the benefits of endowment policies, you can make an informed decision about investing in them. Remember, financial security is essential for a stress-free life. So, go ahead and invest in an endowment policy today. If you want more information on endowment policies, follow us on social media for regular updates and tips on financial planning. Remember, investing in your future is always a good idea, even if it means sacrificing a few luxuries in the present!

FAQs on Endownment Policy Benefits

1

What are the advantages of endowment policy?

Endowment policies offer several advantages:

  • Financial Protection
  • Savings and Investment
  • Maturity Benefit
  • Tax Benefits

2

What are the benefits of an endowment fund?

The benefits of an endowment fund include:

  • Long-Term Savings
  • Capital Growth
  • Risk Management
  • Maturity Benefit

3

What are the benefits of pure endowment?

Pure endowment plans offer the following benefits:

  • Focused Savings Objective
  • Financial Security
  • Tax Benefits
  • Flexibility

4

What is the purpose of the endowment plan?

The purpose of an endowment plan is to provide a combination of insurance cover and savings or investment benefits to policyholders. Endowment plans serve as a financial tool for individuals to:

  • Ensure financial protection for their beneficiaries in case of the policyholder’s demise.
  • Accumulate savings over time through regular premium payments, providing a lump sum payout or regular income stream upon maturity.

5

What is the maturity benefit of endowment plan?

The maturity benefit of an endowment plan typically includes a lump sum payout or regular income stream upon the policy reaching its maturity date. This payout represents the accumulated savings and investment returns over the policy term, providing policyholders with a financial cushion for future needs or goals.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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