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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.

  • Jul 06, 2022

Endowment plans refer to the 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 does an endowment plan work and the benefits it offers. Keep scrolling through to know the details.

Working of Endowment Plan

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.

Benefits of Investing in an Endowment Plans

Now that you know how does an endowment plan work or how it is calculated, let’s 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 the 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.

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.

In this policy, the investment risk in the investment portfolio is borne by the policyholder.

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