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Different Types of Endowment Plans

There are several types of endowment plans, each with its own unique features and benefits. Learn more about them here.

  • 6,087 Views | Updated on: Mar 20, 2024

Key takeaways

  • An endowment plan is a life insurance policy that ensures the financial security of the policyholder and their family in case of any unfortunate event.
  • One of the benefits of endowment policies is the availability of riders that can be added to the policy to enhance its coverage.
  • Endowment plans are suitable for people who have long-term savings goals, such as buying a house or funding their children’s education.
  • If you’re looking for ways to supplement your retirement income, an endowment life insurance policy can be a good option.
  • An endowment policy is an excellent option if you want guaranteed benefits with a low-risk investment.

“If you buy things you do not need, soon you will have to sell things you need,” quoted by the famous American business magnate, Warren Edward Buffett.

Do you find it difficult to cut your unnecessary expenses? This might be because you have a habit of overspending, which means spending more than you can afford. Overspending can keep you from meeting your financial goals by crippling you financially. An Endowment plan is intended for you if you find it challenging to lead a disciplined life and control your expenses. Keep reading to understand an endowment policy and the types of endowment policies.

What is an Endowment Plan?

An endowment plan is a life insurance policy that ensures the financial security of the policyholder and their family in case of any unfortunate event. An endowment plan not only takes care of your loved ones after your unfortunate demise but also helps you build a corpus to meet your long-term goals, thereby fulfilling the dual objectives.

Read About Endowment Plan in Detail : What is an Endowment Plan

How Does Endowment Policy Work?

Endowment policies work by combining life insurance coverage with a savings element. Policyholders pay a regular premium over a set term. Part of the premium goes towards the cost of insurance, while the remainder is invested by the insurance company to build cash value.

This cash value of the endowment policy grows over time through investment returns, and the policyholder can access it in a number of ways. They can borrow against the cash value or withdraw it, although withdrawals may be subject to fees and taxes. At the end of the policy term, the policyholder receives the full cash value of the policy as a lump sum payment.

If the policyholder dies before the end of the policy term, the beneficiaries receive a death benefit payout that is typically equal to the face value of the policy plus any accumulated cash value. If the policyholder outlives the policy term, they receive the full cash value of the policy as a lump sum payment.

What are the Riders Available with the Endowment Policy?

One of the benefits of endowment policies is the availability of riders that can be added to the policy to enhance its coverage. Riders are additional benefits that can be added to a policy, providing policyholders with additional protection or benefits that are not included in the standard policy. Below are some of the most common riders available with endowment policies:

Accidental Death Rider

This rider provides an additional benefit to the policy’s beneficiaries in the event of the policyholder’s accidental death. If the policyholder dies due to an accident, the beneficiaries receive an additional payout in addition to the policy’s regular death benefit.

Critical Illness Rider

This rider provides coverage for certain serious illnesses such as cancer, heart attack, or stroke. If the policyholder is diagnosed with one of these illnesses, the rider will pay out a lump sum amount to help cover medical expenses and other costs associated with the illness.

Disability Income Rider

This rider provides regular income payments to the policyholder if they become disabled and are unable to work. The income payments can help cover living expenses and other costs while the policyholder is unable to earn an income.

Waiver of Premium Rider

If the policyholder becomes disabled and is unable to work, this rider waives the policy’s premium payments. The rider ensures that the policy remains in force even if the policyholder is unable to pay the premiums.

Term Rider

This rider provides additional coverage for a specific period of time, usually a set number of years. The term rider can be used to provide additional coverage during a time when the policyholder’s financial obligations are higher, such as when children are young or when a mortgage is still being paid off.

Guaranteed Insurability Rider

This rider allows the policyholder to purchase additional coverage at a later date without undergoing a medical exam or providing evidence of insurability. This rider is useful for those who anticipate a future need for additional coverage but may not qualify for it at a later date due to health or other factors.

Who Should Buy an Endowment Plan?

Endowment plans are suitable for people who have long-term savings goals, such as buying a house or funding their children’s education. They are also suitable for those who want to save money for retirement or other long-term financial goals. Here are some specific examples of people who should consider buying an endowment plan.

Young Professionals

Young professionals who are just starting their careers can benefit from an endowment plan. They have a long-term savings goal and can afford to make regular contributions to the plan. They can also benefit from the endowment insurance plan coverage.

Parents

Parents who want to save money for their children’s education or future can benefit from an endowment plan. The plan can help them build up savings over time and provide a lump sum payment when their children are ready to go to college or start their careers.

Self-Employed Individuals

Self-employed individuals may not have access to a company-sponsored retirement plan, and an endowment plan can be a good option for them. It can help them save for retirement and provide them with insurance coverage at the same time.

Individuals With High-Risk Jobs

Individuals who have high-risk jobs, such as those in the military or law enforcement, can benefit from an endowment plan. It can provide them with insurance coverage in case of an accident or death while also helping them save for the future.

Individuals With a Low-risk Tolerance

Endowment plans are considered low-risk investments, making them suitable for people who have a low-risk tolerance. They offer a guaranteed return and can provide peace of mind for those who are hesitant to invest in riskier options.

When to Buy Endowment Life Insurance?

Endowment life insurance is a type of life insurance policy that not only provides a death benefit to your beneficiaries but also offers a savings or investment component. With an endowment life insurance policy, you can accumulate savings over the policy’s term and receive a lump sum payment at the end of the policy term, even if you survive the term. But when is it the right time to buy an endowment life insurance policy?

Here are some situations in which buying endowment life insurance can be the right choice.

You Want to Save for a Specific Financial Goal

Endowment life insurance can be an effective way to save for a specific financial goal, such as a child’s college education or a down payment on a home. By choosing a policy term that aligns with your financial goal, you can save consistently and receive a lump sum payment at the end of the term to help achieve your goal.

You Want to Supplement Your Retirement Income

If you’re looking for ways to supplement your retirement income, an endowment life insurance policy can be a good option. By choosing a policy with a long-term policy term, you can accumulate savings over time and receive a lump sum payment at the end of the term to help supplement your retirement income.

You Want to Leave a Legacy

If you want to leave a legacy for your loved ones or a charitable cause, an endowment life insurance policy can help you achieve that goal. With the death benefit and the lump sum payment at the end of the term, you can leave a substantial amount of money to your beneficiaries or the charity of your choice.

You Have a Stable Source of Income

Endowment life insurance policies can be expensive, and you’ll need to make regular premium payments to keep the policy in force. If you have a stable source of income and can afford the premiums, an endowment life insurance policy can be a good investment.

You’re Young and Healthy

The younger and healthier you are when you buy an endowment life insurance policy, the lower your premiums will be. By buying a policy when you’re young and healthy, you can lock in lower premiums and potentially save money over the life of the policy.

Conclusion

An endowment policy is an excellent investment tool that is a long-term plan and promises a good return after a long period, along with additional benefits. Endowment policies provide financial security for your future needs and your loved ones in your absence and help you lead a disciplined life. You can develop a habit of saving and also increase the value of your savings by investing in different types of endowment policies.

- 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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