Endowment plans are life insurance that provides life cover against death or a maturity benefit at the end of the policy tenure. You are paid a lump sum after a specific period called the maturity period. For an endowment policy the insurance company will pay your nominee in case you are no more or will pay you after the maturity period if you survive the policy term. An endowment plan is a type of life insurance policy that provides life cover as well as a maturity benefit. The life cover component provides a lump sum payout to your loved ones in the case of your unfortunate demise, while the maturity benefit component provides a fixed payout given at the time of maturity. The returns help you achieve your investment goals such as buying a car, paying for a down payment for a house or child’s education.
How Does an Endowment Policy Work
After understanding what an endowment plan is, you should also be aware of how it works before you contemplate investing in one. An endowment plan provides both life coverage and also helps in wealth creation. It provides financial security for your family by way of death benefit and helps your savings grow by way of returns on the premiums paid. Flexibility in premium payment modes is the advantage of an endowment policy. You can pay the premiums either monthly, quarterly, half-yearly, or yearly. Single premium payment is also enabled depending on the endowment plan you choose.
You get a predetermined lump sum amount on the maturity of the endowment policy. The maturity proceeds are not affected by market fluctuations or any other changes. You can determine the sum assured depending on the funds required for your financial goals and customise the endowment plan accordingly. In case of the unfortunate death of the policyholder during the policy term, the beneficiaries or nominees will receive the life cover amount as per the plan, along with any other additional benefits specified in the plan. The sum assured depends on the type of endowment policy purchased. For instance, guaranteed returns depending on the premium are provided in a low-risk endowment plan, whereas in unit-linked plans, the returns depend on the market conditions.
After knowing the endowment plan meaning and how they work, you can make an informed decision.
Types of endowment plans
Information about the customisable plans available under endowment policy to suit individual financial goals is important besides knowing the endowment policy meaning:
Unit Linked Endowment Plan: This ULIP plan is a combination of life cover and wealth creation. This endowment plan is suitable for individuals who aspire for both financial security for the family as well as returns on investment. A part of the premium paid by the policyholder is invested in the market, and the rest of it is utilized to offer life coverage. An additional advantage is the policyholder is given the choice of fund type. The choice depends on the policyholder's appetite for risk.
Endowment with full profits: This plan provides for predetermined assured returns. This plan mitigates the risk of market fluctuations by paying out an assured amount on the maturity of the policy or the untimely death of the policyholder. The policyholder is entitled to additional bonuses declared by the company from time to time which will be paid out along with the survival benefit or on the untimely death of the policyholder.
Low-Cost Endowment: The premiums fixed for this plan are low and can be an ideal long-term savings plan for individuals who intend to create a corpus for financial goals that are way ahead, like children’s higher education, children’s marriage, post-retirement fund, etc. The funds accumulated will be paid at the end of the policy term. The corpus created can also be utilised to pay off loans as well. Among the different types of life insurance plans, low-cost endowment plans are the most popular as they enable the creation of a corpus with nominal investment.
Non-profit Endowment: If you want predictable and predetermined returns, a non-profit endowment policy is the ideal plan for you. A guaranteed sum will be given upon the maturity of the policy or the death of the policyholder. No bonuses or profits beyond the guaranteed amount will be given. The sum assured at the time of purchasing the policy will be the final payout.
Guaranteed Policy: A guaranteed policy ensures that the policyholder gets a guaranteed amount upon the maturity of the policy or in the event of the demise of the policyholder during the policy term. The payout is guaranteed irrespective of the returns on investment made by the insurance company with the premiums paid by the policyholder.
Benefits of endowment policy
An informed decision while purchasing a policy can be made only on understanding what the endowment policy is and the associated benefits. The several benefits of an endowment policy are given below:
1. Ensure financial security for your family: You now know the endowment plan meaning and that it offers dual benefits of life cover as well as savings. If anything unforeseen happens during the policy term, the beneficiaries or the nominee will get a lump sum amount providing financial security for your family. Some endowment plans also provide additional benefits by way of bonuses, which can be redeemed along with the death benefit.
2. Helps Build Savings: As suggested by the definition of an endowment plan, investing in an endowment policy is a savings plan with systematic investment by way of regular premium payments. The final payout is coupled with bonuses declared by the company from time to time, along with other guaranteed benefits.
3. Flexibility to Choose Premium Payment Frequency: The endowment plan offers flexible premium payment options depending on the convenience of the policyholder. It can be paid monthly, quarterly, half-yearly, or yearly. The flexibility allows the policyholder to budget and plan the savings.
4. Loan Option: It is important to know if emergency funds are available when in need during the policy term in addition to understanding the endowment policy meaning. The policyholder can avail loan against some endowment policies when in need of urgent funds. The funds can be for any purpose.
5. Maturity Benefits: Additional benefits in the form of guaranteed additions and bonuses announced by the insurer from time to time are offered along with the sum assured in some endowment plans. This increases the fund value and helps in substantial wealth creation for the systematic investments made in the investment plans.
6. Tax Advantages: In addition to providing financial stability and life cover, endowment plans also help reduce the tax burden. The premiums paid towards an endowment policy are eligible for tax deduction deductions under 80C of the Income Tax Act 1961.
Why should a person purchase an Endowment Policy
Here are some reasons to purchase an endowment policy:
An endowment policy is a perfect balance between life risk coverage and savings component.
Through an endowment policy one is able to save money in a systematic manner for future needs.
Policyholders receive a maturity amount upon surviving the policy term.
Helps secure the financial future of dependents and family in case of the policyholder’s death.
Offers risk-free and fixed returns on a limited sum assured. Hence it is a suitable investment for risk-averse investors.
Investors can avail tax benefits on the premiums paid up to a specified limit, as per Section 80C of the Income Tax Act.
Documents Required for an Endowment policy
Given below is the list of documents required to buy an endowment policy. Also shared are documents required to make a maturity claim and a death claim.
1. Documents Required for Application:
Application form
Photograph of the applicant
Address proof
Proof of income
2. Documents Required for Maturity Claim:
Discharge Voucher
Endowment Policy Document
3. Documents Required for Death Claim:
Death certificate
Claim form
Endowment Policy Document
Assignment/ Reassignment deeds if any
Discharge form — Executed and witnessed
An endowment policy offers a dual benefit. Upon maturity (policy term end), you receive a lump sum payout (sum assured + bonuses) if you survive. If you pass away during the term, your beneficiaries get a death benefit. This makes it a suitable option for long-term savings goals and financial security for your loved ones.
Endowment Plans- Tax-Free
Returns from endowment plans are exempt from taxes, subject to some limitations. Policyholders, nominees, and potential buyers should be aware of two kinds of tax benefits for endowment plans:
Premium Deduction: Policyholders are eligible to receive a deduction on the premiums paid according to Section 80C of the Income Tax Act 1961. The deduction is capped at a maximum of Rs 1,50,000 per year. Benefits Exemption: Tax exemption can be claimed on the benefits received from the endowment plan under Section 10(10D) of the Income Tax Act 1961. This exemption encompasses both the maturity benefit and the death benefit. However, certain criteria must be met to qualify for this exemption.