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What is an Endowment Plan?

An Endowment plan is a type of life insurance which serves the insured in more than one way. It is a combination of both an insurance cover as well as an investment plan. Generally, endowment policies are designed to pay a lump sum benefit after a specific term, i.e. on the maturity of the policy. However, if the insured person dies before the maturity of his/her endowment plan, the nominee will receive the sum assured (plus the bonus, if any) from the insurer.

What are the types of Endowment Plans?

Endowment plans can be basically divided in the following types depending upon the policyholder:

1. Unit-linked endowment

In this type of endowment plan, the premiums can be bifurcated into various units of investment funds. These funds can be chosen by the policyholder.

2. Traditional endowment plans

This type of endowment plan enables the insurer to pay a death benefit which is equal to the sum assured at the beginning of the endowment plan. In this case, the final payable amount is more than the sum assured by the insurer.

Benefits of Endowment Plan

  1. By buying an endowment plan, a person can be assured of having a long term systematic savings plan. Depending on the type of plan, an endowment plan can act as an investment for the policyholder's own use or can benefit the beneficiaries upon the unfortunate death of the policyholder.

  2. Endowment plans have tax benefits under section 80C and 10(10D) of the Income Tax Act. This in turn can have monetary benefits for the policyholder himself.

  3. Not only does an endowment plan acts as an investment or life cover but the policyholder can opt for various riders like disability, critical illness, waiver of premium, etc. among others.

  4. In case of an emergency, the policyholder can get a loan against his/her endowment plan. Instead of going through the process of getting a loan from third party, the policyholder can get this loan from a trusted insurer with whom he has already been investing.

  5. Insurance companies may declare a bonus on endowment plan which may be released at the end of the endowment policy i.e. on maturity. This type of plan is called as a profit endowment plan.

Riders available under Endowment Plan

The following benefits can be chosen with an endowment plan, these are optional.

Critical Illnes: If the policyholder is diagnosed with a critical illness like cancer, heart attack, paralysis, kidney failure, etc. The policyholder will get a lump sum amount.

Accidental Death: When the policyholder opts for this additional rider, the insurer will pay accidental death benefit in addition to the Death Benefit to be given to the beneficiary.

Disability: The disability rider proves to be highly beneficial to the policyholder if he/she suffers from a partial or permanent disability.

Waiver of premium: Through this rider the insured is not liable to pay the premiums of the endowment policy in case the policyholder suffers from a critical illness or permanently disabled.

Things You Need to Know Before Buying an Endowment Plan

  • Maturity Benefit: When a policyholder survives the tenure of an Endowment plan he/she is given a lump sum amount which is the sum assured.

  • Bonus Offered: The bonus declared on a with-profit endowment plan is not paid immediately. The bonus amount gets accumulated and is payable on the maturity of the plan or in case of death of the policyholder. Bonus are classified as:

    • Reversionary Bonus: The policyholders of a with-profit policy sometimes receive a bonus. This bonus is a share in the profits made by the life insurance company. The bonus amount is added to the policy. Reversionary bonus is not compulsory.
    • Terminal Bonus: A Terminal bonus is paid at the maturity of a policy. One can consider this as return for loyalty of the policyholder, maintained throughout the policy tenure.
  • Factors to Consider: Before finalizing on any endowment plan, a person needs to consider factors such as his current life stage, the amount of premium payable, current income, needs and risk to name a few. Choosing a plan based on these factors will help a person in narrowing down his search to an exact plan to be chosen.

  • Claim Settlement Ratio: Claim settlement Ratio indicates the ratio of claims settled per financial year against the claims received. Higher the percentage of claim settlement, better the chances of having a hassle free payment to the policyholder's beneficiaries. When percentage is low it indicates that the company has higher claim rejection rate.

    • It is important to take a look at the track record of the insurer. This will eliminate the risks involved if bonus is declared on the endowment policy.

    • Declaring a bonus on an endowment policy is not mandatory for the insurer. In case a bonus is declared, it will get accumulated and will be paid at the maturity of the endowment policy.

    • It is important to have a keen look at the customer service offered by your insurer. After all, this will ensure a smooth and hassle-free claim settlement to your beneficiaries when you aren’t around.

Popular Endowment Plans in India

New Endowment Plan – LIC

MinimumMaximum
Entry Age8 Years55 Years
Maturity Age-75 Years
Policy Term12 Years35 Years
Premium Paying Term12 Years35 Years
  • Accidental Death and Disability Benefit Riders are available
  • Loan against endowment plan
  • Sum assured on death will be the higher of Basic Sum Assured or 10 times of annualised premium.
  • Simple Reversionary Bonuses which act as policy participation in profits of the Corporation

Kotak Premier Endowment Plan

MinimumMaximum
Entry Age18 Years60 Years
Maturity Age70 Years
Policy Term10 Years30 Years
Premium Paying Term (Regular)10 Years30 Years
  • Additional bonus is available from the 6th year from the issuance of the policy
  • Pay convenient premiums regularly or opt for the limited premium payment option
  • Choose from a wide number of additional riders for extra cover
  • After regular premium payment of 3 years, policyholder can surrender the policy and will get a Guaranteed Surrender Value

Factors for Choosing the Right Endowment Plans

There are many types of endowment plans available in the market today. To choose the right endowment plan for yourself consider the following factors.

  • Age: The sooner you buy an endowment plan for yourself, you will get better benefits upon regular payment and maturity of your policy.

  • Income: Choose a plan for which premium payment does not feel like a big hole to your pocket.

  • Human Life Value: An easy way to decide on the amount of endowment policy cover is to calculate the policyholder’s Human Life Value. To simplify the concept of HLV, consider the future earnings and add it to the assets and remove the liabilities from this sum. Now multiply this amount with your current income and the number of years remaining for retirement. The final amount will help in deciding the amount of an endowment policy.

  • Health Status: For an insurer, the policyholder’s health is used to roughly determine his/her age. The healthier you are the longer you will live and less expensive your endowment policy will get. Not all the insurance companies will have an health examination but the policyholder is asked questions regarding the status of his/her health.

  • Duration of cover: The duration of your endowment plan should roughly coincide with the next large payment you need to make, for example mortgages or settlement of home loan.

  • Budget: Among a number of insurance plans available in the market, choose the one which fits your budget bearing in mind that you also need to pay adequate premiums till the maturity of the policy.

  • Insurer: A quick research on the insurer's background will help in easier claim settlements.

  • Riders: An endowment plan with more number of riders to choose from will serve as a better cover for the policyholder.

  • Documents Required: In order to apply for an endowment policy, customers will mostly be required to submit basic documentation such as the following:

    • Fully filled Application form/Proposal form.
    • Photograph.
    • Proof of residence / address proof.
    • Proof of age.

Endowment Plan FAQ's

What is the right time to buy an endowment plan?

Now is the right time to buy an endowment plan. The sooner you start savings the better will be the benefits that you will receive on the maturity of your endowment policy.

What are Riders?

Riders are additional insurance covers that you may choose while buying an endowment plan. These provide benefits if case of disability, critical illness, additional death etc. The riders come at an additional premium.

Do endowment plans offer tax benefits?

Yes, Sections 80C, and the received benefits fall under Section 10(10D) allowing the policyholder to avail for tax benefits.

Can I buy an endowment plan for my child?

Yes, in this case you are the policyholder and the child will get a lump sum in case of the policyholder's death.

Can I change the beneficiary of my endowment plan mid-way?

Yes the beneficiary can be changed during the tenure of the policy. In this case the insurer needs to be informed.

Do I need a large set of documents to buy an endowment plan?

No, buying an endowment is a hassle free process. You will require just a basic set of documents.

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