What is an Endowment Plan? Meaning, Features & Benefits

An endowment plan is a life insurance policy that combines insurance coverage with savings, paying a lump sum upon maturity or death.

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There is no denying that everyone wants a long and happy life for themselves and their loved ones. This is why life insurance is gaining immense popularity. It not only protects your loved ones after your untimely death or disablement but also offers a secure, happy, and fulfilling post-retirement life that you can enjoy with your whole family.

Do you wonder what is endowment plan or why it has gained immense popularity? Let us dive deeper to know what is endowment policy meaning and how it works.

Definition of Endowment Policy

An endowment policy is a type of life insurance policy that not only offers life coverage but also includes a savings component. In the event of the policyholder’s death, the nominee receives a death benefit. However, if the policyholder survives the policy term, a maturity benefit is paid out, often including bonuses. This dual benefit makes endowment plans meaning appealing for those who wish to ensure financial security for their loved ones in case of an unfortunate event, while also building a financial corpus for future needs. It’s an effective tool for long-term financial planning, combining protection with savings.

How Does an Endowment Policy Work?

Before you decide to buy an endowment plan, it’s really important to understand how it works and why it might be a good fit for you.

Here’s the deal with endowment plans: You make regular premium payments over a specific period. Part of the money you pay goes towards life insurance coverage, and the rest is invested by the insurance company. Over time, these investments grow, and when your policy reaches its maturity—meaning the end of the term—you get a lump sum payout. This payout includes the sum assured (the guaranteed amount) plus any bonuses that have accumulated along the way.

Now, here’s another key aspect: if something happens to you during the policy term, your beneficiaries will receive the sum assured. This ensures that your loved ones are financially protected even if you’re not around. So, an endowment plan not only helps you save and grow your money but also provides a safety net for your family.

Types of Endowment Life Insurance Policy

Now that you know what are endowment plans, let us take a look at their types. There are several types of endowment life insurance policies, each with its own features and benefits.

With-profit Endowment Policies

With-profit endowment policy is also known as participating endowment plans. It offers guaranteed benefits (sum assured) at maturity and potential bonuses based on the insurance company’s performance.

Unit-linked Endowment Policies

These are market-linked insurance plans where a portion of your premium goes towards investment in units of mutual funds. The maturity benefit depends on the fund’s performance. These plans offer higher potential returns but come with market risks.

Non-participating Endowment Policies

Suitable for those seeking fixed returns and predictability, these plans offer guaranteed sum assured and maturity benefits at the policy’s outset. However, no bonuses or profit sharing is provided by the insurance company as these are not linked to any market-related plan.

Limited Premium Payment Endowment Policies

Limited premium payment endowment plan allows you to pay premiums for a shorter period but provides coverage for a longer term. These plans have higher premiums within payment terms and are more suitable for those with a limited window for a high-income generation.

Money-back Endowment Policies

Money-back policies offer periodic payouts throughout the policy term along with the maturity benefit. They provide liquidity through periodic payouts and can be helpful for short-term financial needs.

Features of an Endowment Policy

Some of the key features of an endowment policy are:

Death along with Survival benefits

When it comes to endowment plans, they offer a unique combination of death and survival benefits. Let’s say the insured person unfortunately passes away before the policy matures. In that case, the nominee or beneficiary receives not just the sum assured but also any bonuses accumulated over time. It’s a way to ensure that the family is financially protected during such difficult times.

If the policyholder lives beyond the policy term, they don’t walk away empty-handed. They receive the sum assured, which acts as a nice financial cushion for future needs. This dual benefit is one of the key attractions of endowment plans.

Higher Returns

One of the standout features of an endowment plan is its potential for higher returns compared to a simple life insurance policy. These plans do more than just offer a safety net for your loved ones in case of an untimely demise. They also help in building a substantial financial corpus over time.

Premium Payment Frequency

Another aspect of endowment plans is the flexibility they offer in terms of premium payments. You can choose how you want to pay your premiums, whether it’s regular, in a single lump sum, or through limited payments spread over time.

Flexibility in Coverage

Endowment plans also offer flexibility when it comes to coverage. You can enhance your policy by adding riders, which are additional benefits that cover specific scenarios. For example, you can add riders for critical illness, total disability, or accidental death to increase your coverage.

Tax Benefits

From a tax perspective, endowment plans come with attractive benefits. Under Section 80C of the Income Tax Act, you can enjoy tax exemptions on the premiums you pay. Moreover, the maturity or final death payouts are also tax-exempt under Section 10(10D), making these plans a tax-efficient investment option.

Low Risk

Lastly, if you’re someone who prefers a safer investment avenue, endowment policies might be a good fit. Unlike mutual funds or Unit Linked Insurance Plans (ULIPs), endowment policies do not directly invest in equity funds or the stock market.

Benefits of an Endowment Policy

When you invest in an endowment policy, it’s not just about securing a sum assured for the future; there’s also the possibility of receiving various bonuses that the insurance company might declare. These bonuses are essentially extra amounts of money added on top of what you would normally receive. However, only those with a “with-profits” policy are eligible for these bonuses. These bonuses are only paid out if the insurance company has extra funds left over after covering all their claims, costs, and expenses for the year.

Types of Bonuses

Reversionary Bonus

Think of this as a bonus that gets locked in. Once it’s declared, it adds to the amount payable when your policy matures or upon the policyholder’s death. The best part? Once a reversionary bonus is added, it can’t be taken away, provided the policy continues until maturity or the policyholder passes away.

Terminal Bonus

This is more of a discretionary bonus, meaning it’s up to the insurance company to decide. It might be added to the payout when your policy matures or upon the death of the insured. It’s like an extra reward for sticking with your policy until the end.

Rider Benefits

Endowment policies can be quite flexible, especially when you add rider benefits. These are additional covers you can purchase to enhance your policy. Here are some popular rider options:

Accidental Death Rider

With this rider, your nominee receives an extra payout if you pass away due to an accident. It’s an additional benefit on top of the standard death benefit, providing more financial security to your loved ones in such unfortunate circumstances.

Critical Illness Cover

This rider acts like a safety net if you’re diagnosed with a critical illness like a heart attack, cancer, or kidney failure. It provides a lump sum payment to help cover medical expenses or any other financial needs that arise during treatment.

Disability Rider

One of the most valuable riders, the disability rider, offers financial support if you experience permanent or partial disability. It can help you manage your finances and maintain your quality of life during challenging times.

Waiver of Premium

If you suffer from a permanent disability or a critical illness, this rider ensures that you don’t have to worry about paying premiums for your endowment policy. The policy continues without the stress of premium payments, letting you focus on your health and recovery.

Hospital Cash Benefit

If you’re hospitalized, this rider provides a daily allowance to help cover hospital expenses. Plus, it often includes coverage for post-hospitalization costs, easing the financial burden during recovery.

Maturity Benefits

When your endowment policy reaches its maturity or if you outlive the policy term, you receive the sum assured plus any bonuses accumulated over the policy’s duration. The great news? The amount you receive upon maturity is tax-free, making it an attractive saving option. This is known as the maturity benefit of an endowment policy, and it serves as a significant financial boost to help achieve your long-term goals.

Documents Required for an Endowment Policy?

When you’re planning to purchase an endowment policy, it’s important to know exactly what documents you’ll need to get started and how to make claims when the policy matures or in the unfortunate event of the policyholder’s death. Let’s break down the required documents for each scenario.

Documents Required to Buy an Endowment Policy

Application Form
Photograph of the Applicant
Address Proof
Proof of Income

Documents Required for a Maturity Claim

Discharge Voucher
Endowment Policy Document

Documents Required for a Death Claim

Death Certificate
Claim Form
Endowment Policy Document
Assignment/Re-assignment Deeds
Discharge Form

Why Must You Apply for an Endowment Plan?

Think of endowment policies as a two-in-one financial tool: not only do they help you save consistently over time, but they also provide valuable life insurance coverage. This means that while you’re putting money aside, you’re also ensuring that your family and dependents have a safety net in case something happens to you.

While it’s true that the returns on endowment policies might not be as high as some other investment options, they come with the benefit of being risk-free. You’re guaranteed a certain sum assured at the end of the policy term, which can provide peace of mind knowing that your money is safe.

Another great perk of endowment plans is the tax benefits. You may be eligible for deductions on the premiums you pay, which can make these policies even more attractive. However, it’s important to be aware of the specific conditions that apply to these tax benefits to make the most of them.

Endowment plans are particularly popular among risk-averse investors. If you’re someone who prefers to avoid the ups and downs of the stock market and is more interested in preserving your capital while getting a guaranteed return, an endowment policy could be a perfect fit for you.

Moreover, endowment policies provide life cover to the insured, offering a payout in the unfortunate event of death during the policy term. This ensures financial security for your loved ones. If you outlive the policy term, you receive the maturity amount, which can be a significant financial boost to meet your future goals or expenses.

Key Takeaways

Endowment plans combine life insurance benefits with a long-term savings plan for policyholders.
It offers a guaranteed sum assured payout at maturity, plus potential bonuses.
You can choose from different policy types, like traditional or market-linked plans, to suit your risk tolerance.
Endowment plans have lower returns compared to some investments and limited access to money before maturity.

Conclusion

With several investment plans in the market, it has become tough to choose one. However, when it comes to stable and growth-centered investment products, endowment plans have always been investors’ first choice. These plans offer the benefit of lump sum payment in case of any mis-happening. If you want to secure your family’s future, then an endowment plan is your solution. So, do not waste time and invest in an endowment plan today!

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.

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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What is an Endowment Plan? Meaning, Features & Benefits

Definition of Endowment Policy

How Does an Endowment Policy Work?

Types of Endowment Life Insurance Policy

With-profit Endowment Policies

Unit-linked Endowment Policies

Non-participating Endowment Policies

Limited Premium Payment Endowment Policies

Money-back Endowment Policies

Features of an Endowment Policy

Higher Returns

Premium Payment Frequency

Flexibility in Coverage

Tax Benefits

Low Risk

Benefits of an Endowment Policy

Types of Bonuses

Rider Benefits

Hospital Cash Benefit

Maturity Benefits

Documents Required for an Endowment Policy?

Documents Required to Buy an Endowment Policy

Documents Required for a Maturity Claim

Documents Required for a Death Claim

Why Must You Apply for an Endowment Plan?

Key Takeaways

Conclusion

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