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How Does an Endowment Plan Work?

If you have applied for an endowment plan, you will have to pay premiums over time, on which you will earn an additional amount plus benefits at maturity.

  • 6,307 Views | Updated on: Mar 20, 2024

Financial security and planning for the future are essential components of a well-rounded life. In this pursuit, we look for various investment and savings options to ensure their long-term stability.

One such option that has gained popularity over the years is the endowment plan. Endowment plans are versatile financial instruments that combine elements of insurance and investment, providing policyholders with a dual benefit of protection and wealth accumulation.

What is an Endowment Plan?

Endowment plans refer to life insurance policies that not only offer risk coverage during unforeseen events but also provide maturity benefits to the policyholder at the end of the term. It combines savings with insurance coverage. Also, it is a type of risk-free investment plan that guarantees profit to the policyholder. The basic principles of all the endowment plans are the same; however, they vary based on policyholders’ preferences.

Here is an in-depth detail of how endowment insurance works and the benefits it offers.

How Does Endowment Plan Work?

If you have applied for an endowment plan, you will have to pay premiums over time, on which you will earn an additional amount plus benefits at maturity. At maturity of the policy, the insured money is released as its whole, making it more attractive to policyholders who want to invest money to get their hands on a large sum in one go

The premium of the endowment plan is calculated according to the sum assured on maturity selected by the investor. For this, you will have to pay a premium for the term you specify, and in return, you will get a maturity benefit, which is the sum assured amount plus any accrued interest at maturity. Apart from this, an endowment plan acts like a risk cover for your family in case of sudden demise.

How is the Endowment Policy Premium Calculated?

The premium charged for the endowment savings plan differs from person to person. Therefore, its calculation depends upon the following factors:

  • Age of the policyholder
  • Policy term
  • Premium payment method
  • Sum assured and many other factors

A percentage of the premium is charged as the administrative cost. Investments are made with the remaining premium amount, generating a certain profit each year. You can also refer to this profit as a bonus. In most circumstances, the bonus is determined as a percentage of the guaranteed amount. Over time, the bonus is distributed to the employee.

Things to Consider Before Investing in an Endowment Plan

Investing in an endowment savings plan might be the ideal decision for you if you are looking for dual benefits, but are you aware of the things you should keep in mind before investing in an endowment plan? If not, fret not! We have got you covered.

Financial Goals

Clarify your financial objectives before opting for an endowment plan. Are you seeking long-term savings, a way to fund your child’s education or additional retirement income? Understanding your goals will help determine if an endowment plan aligns with your needs.

Policy Term

Endowment plans often have fixed policy terms, usually ranging from 10 to 25 years. Consider your time horizon and how long you can commit to the plan. Longer terms might offer higher returns, but they tie up your funds for an extended period.

Risk Tolerance

Endowment plans often invest in a mix of assets like bonds, stocks, and other financial instruments. Consider your risk tolerance – your comfort level with market fluctuations, as it influences the allocation of your premiums.

Premium Payment

Policyholders pay regular premiums over the policy’s term, which can be monthly, quarterly, semi-annually, or annually. A portion of these premiums is allocated toward life insurance coverage, while the remaining amount is invested by the insurance company.

Guaranteed and Non-Guaranteed Benefits

Endowment plans often offer both guaranteed and non-guaranteed benefits. The guaranteed benefits are predetermined by the insurance company and include the sum assured (the minimum amount paid out in case of death) and the maturity benefit. Non-guaranteed benefits, on the other hand, are dependent on the insurance company’s investment performance and may include bonuses or dividends.

Benefits of Investing in an Endowment Plan

Now that you know how an endowment plan work or how it is calculated, let us know the details regarding its benefits:

Additional Bonus

A policyholder receives an additional bonus on the amount invested from their insurer. It is available for all those who purchase a with-profits insurance policy. After spending on expenses, costs, and claims, when the insurer is left with surplus money, they will transfer a bonus check to the policyholder’s account.

When the policyholder reaches maturity, the insurer pays the policyholder a bonus from its profits. In contrast, in the case of the policyholder’s death, an insurer can pay a cash bonus.

Flexibility in Premiums

Endowment plans require the policyholder to pay the premium for a limited time in order to enjoy long-term benefits. Therefore, you can pay the premium amount in a variety of ways. When your premium payments finish, you can acquire a free paid-up policy for a reduced sum assured after a certain time.

Riders’ Advantage

On the basis of your needs, you can pay an additional fee to add additional insurance riders to your policy and increase your insurance coverage. The riders are available from a variety of insurance carriers. You might also benefit from an education endowment plan or a double endowment plan.

Compounded Returns

Since the returns of an endowment plan are compounded over the policy tenure, therefore, they are often higher in comparison to the returns on another form of investment.

Tax Benefits

Apart from offering death and maturity benefits, an endowment plan even provides tax benefits to the policyholder. As per India’s Income Tax Act, the premiums paid for the policy can help you reduce your taxable income.

Endowment plans with a long-term maturity period are more profitable since it is easy to accumulate more money over a more extended period.

Is an Endowment Plan Right for You?

While the features of an endowment plan make it an enticing option, it is important to carefully assess whether it aligns with your financial goals and risk tolerance. The combination of insurance and investment may not offer the same level of returns as pure investment vehicles, but it provides the security of life coverage. Those seeking both protection and moderate growth over a specified period may find an endowment plan to be a prudent choice.

Before committing to an endowment savings plan, it is advisable to compare different policies, understand the terms and conditions, and evaluate the historical performance of the insurance company’s investments. Consulting with a financial advisor can also provide valuable insights and help you make an informed decision based on your unique circumstances.

Final Thoughts

The premiums paid for endowment plans are used to generate risk-free returns. In addition, it protects the investor’s financial security in the event of unforeseen situations and gives both maturity and death benefits. Therefore, an endowment plan investment is a wise decision, and the information presented above will help you comprehend it.

Key takeaways

  • An endowment plan acts like a risk cover for your family in case of sudden demise.
  • Investing in an endowment plan might be the ideal decision for you if you are looking for dual benefits.
  • If you have applied for an endowment plan, you will have to pay premiums over time, on which you will earn an additional amount plus benefits at maturity.
  • The premium of the endowment plan is calculated according to the sum assured on maturity selected by the investor.

- 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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