Endowment Policy: What is an Endowment Plan?

An endowment plan is a life insurance policy, combining insurance coverage with savings. It provides life cover along with a maturity benefit. In this type of plan, the life cover bestows your loved ones with a lump sum payout in case of your unfortunate demise. On the other hand, the maturity benefit issues a fixed payout to you at the time of policy maturity.

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What is an 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 an endowment plan 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?

To help you understand how an endowment policy works, here is a step-by-step guide to help you make an informed decision:

Step 1: Choose Your Policy and Coverage Amount

There are plenty of options available for endowment policies in India. You must find a policy with a sum assured that best suits your and your family’s requirements. The allocation of premium will depend on the coverage amount or the sum assured and also the policy’s term.

If nothing unfortunate occurs during the policy term, you will get guaranteed returns. This means you will get the complete predetermined sum assured, along with the bonus of a maturity benefit. And remember, this predetermined sum assured should preferably be enough to fulfil all your future goals.

Step 2: Decide the Premium Payment Frequency

The premium payment frequencies are another factor that you must take into account when purchasing an endowment policy. These are offered monthly, quarterly, half-yearly and annually. You can choose one that fits your income pattern perfectly.

Step 3: Accumulate Wealth Over the Policy Term

The recurring premium payments made to keep your endowment plan active will help you form a disciplined saving culture and assist in gaining wealth during the policy period.

Step 4: Maturity Benefit Payout

In case there is no accident or mishap within the tenure of the policy, the insurer will pay the amount decided at the time of purchase as a maturity benefit, regardless of the market conditions.

Step 5: Death Benefit For Financial Security

Every endowment plan has a life coverage component to help your family in times of need and give them financial security. In the event of your unfortunate demise during the policy term, your allocated nominees would receive a lump sum amount, known as a death benefit, which can aid them financially after going through a loss.

Step 6: Tax Benefits and Finance Planning

Smart financial planning entails going for policies that are tax-efficient. For example, the premiums you pay for most life insurance plans, including endowment plans, can qualify for deductions under section 80C of the Income Tax Act, 1961. Furthermore, the death benefits that your nominees receive are usually tax exempt under Section 10(10D) of the same Act.

Types of Endowment Life Insurance Policy

Having a clearer picture of what are endowment plans, it is time to take a look at their various types. However, prior to that, we should briefly re-define the endowment meaning, which is a type of life insurance policy that is a combination of financial protection and long-term savings. Each type of endowment plan offers unique benefits based on your goals and risk preferences.

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.

Low-Cost Endowment

Low-cost endowment plans are intended to repay your mortgages or loans at the end of the policy term. It also offers coverage for life and aims to accumulate enough to pay off your outstanding debts. The premiums for this type of plan are usually lower, which makes it a more affordable choice.

Non-Profit Endowment

Non-profit endowment plans provide you with a guaranteed lump sum amount at the end of your policy without any added bonuses. Here, the objective is to ensure that the policyholder or their nominee receives a fixed amount, at maturity or in case of death, respectively.

Guaranteed Policy

Guaranteed endowment plans ensure that a guaranteed amount is payable to you, as a policyholder, or your allotted beneficiaries. This amount is fixed and assured, even in your absence. The face value of the endowment plan will be given to you at the time of maturity or it will be passed on to your beneficiaries, in case of your demise. The bonuses of this type of policy are not assured. Therefore, a guaranteed endowment assurance plan has a dual edge of giving you the assurance of policy benefits and bonuses that may be paid or not.

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

To understand the endowment insurance meaning clearly, it is important to know that endowment plans offer more than just a life cover. Along with the sum assured, you may also receive bonuses declared by the insurer. These bonuses are additional payouts, but they are only available under a “with-profits” policy. Even then, they are paid only if the insurance company has surplus funds left after settling all claims and operational 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.

Things to consider before purchasing an endowment policy?

If you are considering to buy an endowment plan for the first time, these are the things you must look out for:

Goal of the policyholder

First and foremost, understand what is endowment plan. Then, move on to decide what your future financial goals look like. Since these plans guarantee significant returns and are risk-free, they work best for long-term goals like retirement, child’s education, marriage, etc. However, if you are considering fulfilling any short-term goals or need immediate returns, this plan may not be for you.

Endowment plan features

Study the terms & conditions of all plans that you are considering. Evaluate all features like coverage, policy term, premiums to be paid, maturity amount and returns, the availability of riders and more. Compare these plans and find the one that meets your requirements and the one that aligns with your goals.

Importance of an endowment plan

One must always remember that an endowment plan is preferred due to the guaranteed returns with long-term savings. It also offers a life cover that has a savings component, which makes it more sought after than basic term plans. Some people also consider it because of its tax-efficiency, even though many policies offer that. With that said, it is of most importance that you are completely aware of why you need this plan, and how it will benefit you over the years.

You should also consult a financial advisor before investing in an endowment plan to know if it is the best fit for your future goals and your family’s needs.

Documents Required for an Endowment Policy

At the time of purchasing an endowment policy, there are some important documents that you must know about. These documents will help you start the policy smoothly and they will even help you make claims when the policy matures or in case of policyholder’s demise.

Here are the documents required at each stage of the endowment planning process:

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

Difference Between an Endowment and a Money-Back Policy

The table below consists of the most common and notable differences between an endowment plan and a money-back policy:

Features	Endowment Policy	Money-Back Policy
Death Benefit	A lump sum amount is given to the nominee if the policyholder passes away during the policy term.	A lump sum is paid on death to the nominee. But during the policy term, the policyholder also receives small payouts at regular intervals.
Suitable For	Ideal for individuals wanting a life cover along with long-term savings.	Best for individuals who prefer periodic payments as returns along with an insurance cover.
Maturity Benefit	The entire sum assured and bonuses are paid at the end of the policy term.	A part of the sum assured is paid in intervals, while the remaining amount and any bonuses are paid at maturity.
Flexibility	Less flexible. Premiums and coverage remain fixed.	More flexible. You can choose the frequency and the amount of your payouts.
Bonuses	Bonuses are earned depending on how the policy performs.	Bonuses are earned depending on how the policy performs.
Surrender Value	Can be surrendered after a certain period is completed. The payout depends on how much policy term has passed.	Can be surrendered after a certain period is completed. The payout depends on how much policy term has passed.

Are Endowment Plans Tax-Free?

The payout from endowment plans are exempt from taxes, considering certain limitations. Anyone who is interested in buying these plans, who has already invested in these plans, or any nominee/beneficiary of the insured should know about the following tax benefits:

Premium Deduction

As per section 80C of the Income Tax Act, 1961, the policyholders are eligible for deductions on premiums that they pay. The maximum amount that can be deducted in a year is ₹1.5 lakh.

Benefits Exemption

The maturity benefit or the death benefit from an endowment plan can be claimed for tax exemption under section 10(10D) of the Income Tax Act, 1961. Although, certain criteria must be met to qualify for such exemption.

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.

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!

FAQs on Endowment Plans

Who should consider buying an endowment plan?

An endowment plan may be suitable for you if you are looking to get a life cover along with the added advantage of building your savings over time. Anyone who prefers stable, low-risk investments with guaranteed returns, this is the plan for you.

What is the maturity benefit in an endowment policy?

The maturity benefit in an endowment plan refers to a lump sum amount that is given to the policyholder after the successful completion of their policy term. It generally consists of the sum assured along with any benefits that the policyholder may have earned along the duration of the policy.

Are endowment plans good for long-term savings?

Yes. Endowment plans are structured to help you gain financial security as time goes on, and at the same time, keep your savings protected. They can be a reliable savings instrument if you are patient enough and make timely premium payments.

How are endowment plans different from term insurance?

In a term insurance policy, you can only get a death benefit. In case you outlive the policy term, there will be no payout. However, in case of an endowment plan, you get a death benefit along with a maturity benefit if you survive the policy term.

Do endowment plans offer tax benefits?

Yes. The premiums paid by the policyholder are tax deductible under section 80C. Furthermore, the payouts, whether maturity or death benefits, are usually tax-free under section 10(10D) (with conditions).