TeamAckoNov 2, 2023
Endowment Life Insurance Policy is a popular type of life insurance policy that offers both insurance and investment benefits. It is a type of insurance policy that pays a lump sum amount to the policyholder after a specified period or upon the policyholder's death. In this article, we will discuss the benefits, features, and limitations of an endowment life insurance policy in India.
Endowment Life Insurance Policy is a type of life insurance that combines life coverage with savings. Under an Endowment Policy, if the policyholder passes away during the policy term, the nominee receives the sum assured or the death benefit. However, if the policyholder survives the policy term, he or she receives the maturity benefit, which is the sum assured plus any bonuses accrued during the policy term.Endowment Policies offer a disciplined savings avenue and provide financial security for the policyholder and their family. They are typically offered by life insurance companies in India and can be purchased for a specific term or as a whole life policy.
Understanding the different types of Endowment Policies available in India is essential before choosing one. Here are some of the most common Endowment Life Insurance Plans.
With-profit Endowment Policies
This type of policy is designed to offer bonuses or profits on the premiums the policyholder pays. The bonus is usually a percentage of the sum assured and is declared annually by the insurance company. The bonus is added to the policy and paid along with the sum assured on maturity or in the event of the policyholder's death.
Unit-linked Endowment Policies
Unit-linked Endowment Policies provide investment options to the policyholders. The policyholder can choose to invest in various funds, such as equity, debt, or balanced funds, based on their risk appetite. The returns on the investment depend on the performance of the fund(s) chosen by the policyholder.
Non-participating Endowment Policies
Non-participating Endowment Policies do not offer bonuses or profits on premiums the policyholder pays. The sum assured is paid along with the accrued interest on maturity or in the event of the policyholder's death.
Limited Premium Payment Endowment Policies
This type of policy requires the policyholder to pay premiums for a specific period, such as 5, 10, or 15 years, and the policy remains in force for a longer period, such as 20 or 25 years. This allows the policyholder to complete their premium payments within a shorter duration and enjoy the policy's benefits for a longer time.
Money-back Endowment Policies
Money-back Endowment Policies are designed to provide periodic payments during the policy term. The policyholder receives a percentage of the sum assured at specific intervals, such as every 3 or 5 years. The remaining sum assured, along with bonuses, if any, is paid at maturity or in the event of the policyholder's death.
Here's how an Endowment Policy works in India.
Choosing the policy
The policyholder selects an Endowment Policy based on their requirements and preferences. The policyholder decides on the sum assured, policy term, premium payment term, and type of Endowment Policy they want to purchase.
The policyholder pays premiums regularly or as a lump sum, per the policy terms. The insurance company invests the premiums in various investment options such as stocks, bonds, and fixed deposits to generate returns.
The insurance company declares bonuses or profits on the premiums paid by the policyholder, which are added to the policy and paid along with the sum assured at maturity or in the event of the policyholder's death.
At the end of the policy term, the policyholder receives the sum assured along with any accrued bonuses or profits, as per the policy terms. This lump sum amount can be used for various purposes such as retirement planning, children's education, or any other financial goals.
In case of the policyholder's death during the policy term, the sum assured, along with any accrued bonuses or profits, is paid to the nominee as a death benefit. This provides financial security to the policyholder's family in case of any unfortunate event.
If the policyholder decides to surrender the policy before the maturity term, they may receive a surrender value, which is a percentage of the premiums paid, as per the terms of the policy.
Here are some of the benefits of Endowment Policies in India.
1. Insurance coverage
Endowment Policies provide life insurance coverage to the policyholder, ensuring financial security for their family in case of their untimely death. The sum assured and any accrued bonuses are paid to the nominee in case of the policyholder's death, providing a safety net for the family.
2. Guaranteed returns
Endowment Policies provide a guaranteed return on investment, ensuring that the policyholder receives a lump sum payout at the end of the policy term, irrespective of market fluctuations. This makes Endowment Policies a popular choice for risk-averse investors who want to secure their future.
3. Tax benefits
Endowment Policies offer tax benefits under Section 80C of the Income Tax Act, 1961. The premiums paid towards the policy are eligible for tax deduction up to a limit of Rs. 1.5 lakh per year. The maturity amount received from the policy is also tax-free under Section 10(10D) of the Income Tax Act. Note: You need to opt-in for the old tax regime to get a tax benefit on Endowment Policies; also, the extent of benefits are subject to changes.
4. Loan Facility
Endowment Policies provide the option of availing a loan against the policy. The loan amount is a percentage of the policy's surrender value, and the interest rate is usually lower compared to other loan options.
5. Disciplined Savings
Endowment Policies encourage disciplined savings, as the policyholder needs to pay premiums regularly to keep the policy active. This ensures that the policyholder regularly saves towards their financial goals and avoids the temptation to spend the money elsewhere.
Choosing the right Endowment Policy can help you secure your financial future and provide financial security to your loved ones. Here are some tips to help you choose the best Endowment Policy in India.
Assess your financial goals: Before choosing an Endowment Policy, assess your financial goals and requirements. Decide how much money you want to save, how long you want to save for, and what kind of returns you are looking for.
Compare policies: Compare different Endowment Policies offered by various insurance companies in terms of the premium payment term, policy term, sum assured, and payout options. Look for policies that offer the best combination of insurance coverage and returns.
Check the bonus structure: Endowment Policies provide bonuses or profits on the premiums paid by the policyholder. Check the bonus structure of the policy and the company's track record of declaring bonuses before making a decision.
Check the Claim Settlement Ratio (CSR): The claim settlement ratio of an insurance company can be one of the important matrices to check their reliability. Consider choosing an insurer with a high CSR to ensure that your family receives the financial benefit of your Endowment plan after your demise.
Read the fine print: Before choosing an endowment policy, read the terms and conditions carefully. Understand the premium payment terms, policy term, payout options, and other policy details to avoid any surprises later on.
Although Endowment Life Insurance Plans can offer financial security, it's important to consider their limitations before investing in them.
1. Low rate of return
One of the main limitations of Endowment Life Insurance Plans is their low rate of return. While these plans offer a guaranteed sum assured upon maturity, the returns on investment are often lower than what one could earn through other investment options like mutual funds or stocks.
2. Longer lock-in period
Endowment Plans usually have a long lock-in period, which means you cannot withdraw your investment before a certain number of years without incurring significant penalties.
3. Higher premiums
Endowment Plans often have a higher premium than term insurance plans that only provide life cover. This can make it difficult for individuals with limited financial resources to afford these plans.
4. Lower flexibility of premium payments
Endowment Plans may also have low flexibility in premium payments. Unlike other investment options like mutual funds or stocks, Endowment Plans typically require fixed premium payments. This can be problematic for individuals with fluctuating incomes or those who want to make additional contributions to their investments at irregular intervals.
5. Inadequate coverage
Endowment Plans may not provide adequate life coverage for certain individuals. If you have dependents who rely on your income, you may need a higher coverage amount than what an Endowment Plan can provide. In such cases, opting for a Term Insurance Plan with a higher coverage amount may be more suitable.
Yes, you can surrender your Endowment Life Insurance Policy before maturity. Suppose the policyholder surrenders the policy before the completion of the policy term. In that case, they will receive a surrender value calculated based on the number of premiums paid, the policy term, and the sum assured. However, the surrender value may be lower than the total premiums paid.
The sum assured in Endowment Life Insurance Policy is calculated based on the policyholder's age, health condition, and financial needs. It is the amount paid to the beneficiary in case of the policyholder's death. The sum assured may include additional benefits such as accidental death or disability benefits.
Bonuses in Endowment Life Insurance Policy are additional payouts that the insurer makes to the policyholder.
If the policyholder stops paying premiums for Endowment Life Insurance Policy in India, the policy will lapse, and the life cover and savings component will cease. The policyholder can revive the policy within a specific period by paying the unpaid premiums and interest. If the policy is not revived, the policyholder will not receive any benefits, and the policy will be terminated.
Yes, the maturity amount for Endowment Life Insurance Policy is generally guaranteed and predetermined while buying the policy. It includes the sum assured and any bonuses that may accrue during the policy term. The policyholder is typically provided with a projection of the maturity amount when purchasing the policy.
Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet, and is subject to changes.
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