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Everything You Need to Know About Endowment Policy

Sum assured in an endowment policy refers to the guarantee that will be paid out by the insurance company to the policyholder or their beneficiaries upon the maturity of the policy.

  • 6,505 Views | Updated on: May 22, 2024

Sum Assured is a critical element in endowment policies, and understanding it is essential to grasp the benefits and coverage of this type of policy. Endowment policies are a type of life insurance that provides both protection and savings components.

In this article, we will help you understand what endowment policies are and what the sum assured in endowment policies is so you are well aware of the nitty-gritty of the product.

What is an Endowment Policy?

Before taking you all the way directly to endowment policy math, let’s briefly understand what it means.

An endowment policy is a life insurance policy that, along with offering life insurance to the insured, helps the policyholder accumulate money regularly through savings over the specific term of the policy. This gives the policyholder enough corpus by the time the policy matures. In addition, this allows them to get a decent lump sum if the policyholder survives the term. And in the case of an unfortunate demise of the policyholder, the nominee is also offered a decent amount as a part of the endowment life insurance.

The maturity amount that one receives at the maturity of the endowment plan can be used for various purposes like education funding, down payment of house loans, retirement corpus, marriage fund, etc.

What is Sum Assured in Endowment Policy?

Sum assured in an endowment policy is the amount that the policy nominee receives in case of the policyholder’s unfortunate demise. Since an endowment policy is a life insurance product, the policyholder’s life is insured, and the sum assured amount is defined at the beginning of the policy based on factors like how much premium you are willing to pay and what the insurance provider has to offer. Thus, the sum assured is the fixed value finalized at the policy enrollment that the nominee will receive in case of the policyholder’s death.

However, if the policyholder survives the entire term of the policy, then they are entitled to receive the sum assured in the form of a maturity benefit.

How to Calculate the Sum Assured in an Endowment Plan?

Calculating the sum assured in an endowment plan is essential to determine the level of coverage and the potential savings or investment returns that the policy can provide. Below mentioned is a comprehensive guide on how to calculate the sum assured in an endowment plan.

Step 1: Understand the Types of Endowment Plans

Endowment plans come in various types, and it is important to understand the different types before calculating the sum assured. The most common types of endowment plans are

Basic Endowment Plan

This type of endowment plan provides a fixed sum assured, which is predetermined at the time of policy inception. The sum assured remains constant throughout the policy term, and it is paid out upon maturity of the policy or in the event of the policyholder’s death.

Unit-Linked Endowment Plan

This type of endowment plan invests the premiums paid by the policyholder in investment funds, such as stocks, bonds, or mutual funds. The sum assured in a unit-linked endowment plan is determined based on the value of the investment funds and can fluctuate based on the performance of the funds. The sum assured is typically higher than the premiums paid, as it includes both the guaranteed sum assured and the potential investment returns.

Step 2: Determine the Policy Terms and Premiums

Once you have chosen the type of endowment plan, you need to determine the policy term and the premiums you are willing to pay. The policy term is the duration for which the policy will remain in force, and the premiums are the regular payments you need to make to keep the policy active.

The sum assured in an endowment plan is typically calculated based on the policy term and the premiums paid. The longer the policy term and the higher the premiums, the higher the sum assured is likely to be.

Step 3: Consider the Bonus and Additional Benefits

Many endowment plans offer bonuses and additional benefits, such as guaranteed additions, loyalty additions, or terminal bonuses, which can further enhance the sum assured. These bonuses are declared by the insurance company based on its financial performance and are typically added to the sum assured at the time of policy maturity or in the event of the policyholder’s death.

When calculating the sum assured, it is important to take into account these bonuses and additional benefits, as they can significantly increase the overall payout from the policy.

Step 4: Evaluate Riders and Riders’ Sum Assured

Endowment plans often offer optional riders, such as critical illness riders, accidental death riders, or waiver of premium riders, which provide additional coverage to the policyholder. These riders usually come with an additional premium, and they have their own sum assured, which is the amount that will be paid out if the specific event covered by the rider occurs.

When calculating the sum assured, it is crucial to consider the riders and their sum assured, as they can impact the overall coverage and potential payout from the policy.

Step 5: Use Online Calculators or Seek Professional Advice

Calculating the sum assured in an endowment plan can be complex, as it involves multiple factors, such as policy terms, premiums, bonuses, additional benefits, and riders. To simplify the process, many insurance companies offer online calculators that allow you to estimate the sum assured based on your input.

Benefits of an Endowment Policy

In general, any life insurance policy that offers lump sum maturity benefits and a savings component can be termed an endowment policy, be it a ULIP or non-ULIP plan. Although in the financial arena, only a non-ULIP plan with a savings plan component is believed to be an endowment plan. There are multiple benefits to opting for an endowment policy. Here are some of the important ones:

Wealth Creation

An endowment plan provides the policyholder with an opportunity to build a corpus while being secured with life insurance.

Bonuses

An endowment plan policyholder is entitled to various types of bonuses. The insurance company declares these bonuses. Bonuses are an extra amount of money added to the proceeds of investment that are paid by an insurer to the policyholder for various criteria like loyalty bonus, terminal bonus, etc.

Additional Rider

The endowment plans allow you to add insurance riders to your policy to make it a perfect policy for all your needs. You can add riders like critical illness riders, disability riders, accidental death riders, etc.

Tax-free maturity benefit

The sum assured and bonuses a policyholder receives upon surviving the policy term are exempted from tax.

Factors Affecting Sum Assured in Endowment Policies

Endowment policies are a popular form of life insurance that offers both protection and savings. They provide a guaranteed sum assured, which is the amount paid out to the policyholder or beneficiary upon the policy’s maturity or in case of the policyholder’s demise. However, the sum assured in endowment policies is not arbitrary; it is determined by a variety of factors.

Factor 1: Age of the Policyholder

The age of the policyholder at the time of taking out the endowment policy is a significant factor that affects the sum assured. Generally, younger policyholders are charged lower premiums and are eligible for higher sum assured as they have a longer premium paying term, allowing the policy to accrue more savings over time. This is because the premiums paid by policyholders are invested by the insurance company, and the returns generated over the policy term contribute to the sum assured. Thus, the younger the policyholder, the higher the sum assured is likely to be.

Factor 2: Policy Term

The policy term, or the duration for which the endowment policy is in force, also impacts the sum assured. Longer policy terms result in higher sum assured as the policy has more time to generate returns through investments. This allows the insurance company to accumulate more savings, which are added to the sum assured. However, longer policy terms also mean higher premiums, so policyholders need to strike a balance between affordability and the desired sum assured.

Factor 3: Premium Amount

The premium amount paid by the policyholder is directly proportional to the sum assured. Higher premiums result in a higher sum assured, as more funds are available for investment by the insurance company. However, policyholders must be cautious while opting for higher premiums, as they need to ensure the affordability and sustainability of premium payments over the policy term to avoid policy lapses.

Factor 4: Health and Lifestyle

The health and lifestyle of the policyholder also impact the sum assured in endowment policies. Policyholders with good health and a healthy lifestyle, such as non-smokers or individuals with no pre-existing medical conditions, are perceived as lower risk by the insurance company. As a result, they may be eligible for a higher sum assured as compared to policyholders with health risks or lifestyle habits that increase their risk profile. Policyholders may need to undergo medical examinations or provide health-related information to the insurance company during the underwriting process, which can influence the sum assured.

Factor 5: Gender

In some cases, gender can also affect the sum assured in endowment policies. Historically, women have been found to have longer life expectancies compared to men, resulting in lower premiums for women. However, this may also mean that women may receive the lower sum assured compared to men for the same premium amount, as the policy term and the investment returns generated over time may be different due to differences in life expectancies.

Factor 6: Riders and Add-ons

Endowment policies may offer riders or add-ons, such as critical illness riders or accidental death benefit riders, which provide additional coverage to the policyholder. The inclusion of such riders can impact the sum assured, as they may add to the overall coverage and consequently increase the sum assured. However, riders and add-ons also come with additional premiums, which need to be factored in a while calculating the overall affordability and sum assured of the policy.

Conclusion

There are different endowment policies like the Unit Linked Endowment Plan, Profit Endowment Plan, low-cost endowment plan, no profit endowment, and guarantee endowment policy. Based on the financial requirements and goals, an individual can pick the one that best matches their investment criteria. The endowment policy is an excellent way of accumulating and saving money by cutting wasteful expenditures like window shopping and online shopping addiction.

Key takeaways

  • Calculating the sum assured in an endowment plan is essential to determine the level of coverage and the potential savings or investment returns that the policy can provide.
  • Once you have chosen the type of endowment plan, you need to determine the policy term and the premiums you are willing to pay.
  • Many endowment plans offer bonuses and additional benefits, such as guaranteed additions, loyalty additions, or terminal bonuses, which can further enhance the sum assured.
  • Calculating the sum assured in an endowment plan can be complex, as it involves multiple factors, such as policy terms, premiums, bonuses, additional benefits, and riders.

FAQs

1

What happens when the endowment policy matures?

When an endowment policy reaches its maturity date, policyholders have several options depending on the terms and conditions of the policy. One option is to receive the maturity proceeds as a lump sum payment. This can be an exciting and rewarding experience, as policyholders receive a significant sum of money that can be used to fulfil various financial goals or dreams, such as purchasing a home, funding higher education, starting a business, or enjoying a dream vacation. The lump sum payout from a matured endowment policy can provide financial security and open up new possibilities for the policyholder’s future.



2

Why is the sum assured less than the premium paid for the endowment policy?

Endowment policies are a popular type of life insurance that offer both protection and savings. They provide a lump sum payout to the policyholder at the end of the policy term, or to the beneficiary in case of the policyholder’s demise. However, one aspect that often puzzles policyholders is why the sum assured, or the guaranteed payout, is often less than the total premium paid over the policy term. Let’s unravel this mystery and understand why the sum assured is lower than the premium paid for endowment policies.



3

How to increase the sum assured in the endowment policy?

If you have an endowment policy, you know that it is a valuable tool for financial protection and investment. However, as your financial needs and goals evolve over time, you may find that the sum assured of your endowment policy is not sufficient to meet your changing requirements. Fortunately, there are several strategies you can implement to increase the sum assured of your endowment policy and ensure that you have adequate coverage for your financial future.

- 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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