Know Why an Endowment Plan is a Great Idea

On paying premiums regularly for the specified term, not only does the insured receive the sum assured, but also he/she receives bonus and applicable additions accrued during the plan term. These plans, therefore, cover the insured’s life, encourage regular and disciplined savings, and finally pay the lump sum at the end of the plan’s term, irrespective of the circumstances.

Types of endowment plans

The two broad types of endowment policies are with profit and without profit. Within these two categories, different variations are structured to help policyholders meet varied financial objectives, such as savings, children’s education/marriage, retirement, pension, whole life protection etc.

Various types of endowment plans are:

• Endowment assurance policy

• Full endowment policy

• Low cost endowment policy

• Limited payment endowment policy

• Joint life endowment policy

• Double endowment policy

• Unitized with profit endowment policy

• Non-profit endowment policy

• Unit-linked endowment policy

Chief advantages of endowment plans

Dual benefit: Endowment plans offer the dual benefit of long-term investment and insurance. Apart from paying the sum assured (or accumulated amount minus outstanding premiums, whichever is higher) to the beneficiary in case of the policyholder’s demise, endowment plans also pay a lump sum maturity amount (adjusted after considering company performance and premium defaults) if the policyholder survives the policy tenure. This is a key advantage of endowment policies.

Safe: Even though the returns on endowment plans may be lower, they are risk-free in terms of the sum assured.

Disciplined savings: Policyholders need to set aside a pre-determined amount towards the premium payment at a stipulated time interval, thus, encouraging a disciplined approach to saving.

Assured bonus: Endowment plans declare an annual bonus, typically paid out as a specific percentage of the sum assured. In case of the policyholder’s survival, additional bonuses accrued during the policy term are paid in addition to the sum assured. In case of death during the policy term, the death benefit is paid to the nominee, including the full sum assured along with the total accumulated bonus.

Compounding returns: A keyadvantage of endowment plansis that they fetch returns on a compounding basis during the policy term.

Loan facility: Policyholders can take a loan against an endowment policy as and when needed, and this is usually without the need to secure the loan against collateral.

Double tax benefits: One major advantage of endowment plans is that they offer tax benefits as per the Income Tax Act, under Section 80C on the annual premium, and under Section 10D on the death benefit.

High liquidity: Endowment policies are liquid in nature.

Premium flexibility: Another important advantage of endowment plansis that you can pay your premium over a short period and enjoy the policy benefits over a long term. In case premium payments stop after certain minimum years' premiums have been paid, a free paid-up policy for a lower sum assured can be secured - subject to certain conditions.

Additional benefits/riders: Insurance companies offer additional benefits to policyholders, such as marriage/education endowment plans and double endowment plans. An endowment plan also lets policyholders add additional riders for major surgical assistance, critical illnesses etc., by paying a marginal premium.

Suitability of endowment policies

People with a regular income stream (to pay premiums regularly) and those who require a lump sum amount after a certain period may consider an endowment plan. These plans are ideal for salaried people, professionals like lawyers, doctors etc., small entrepreneurs or businessmen etc. to meet their long-term financial security needs. Also, those with a low risk appetite, who wish to include risk-free assured investments in their portfolio, and those who do not mind trading additional risks for lesser returns could opt for endowment plans.

Duration

Since endowment plans are long-term plans in nature, longer the policy period, better the overall benefits. Endowment plans work best if they are taken with a long-term perspective, as this encourages regular savings for an extended period. Those with irregular income may opt for flexi pay or single pay plans instead of regular pay endowment plans.

Important considerations before purchasing an endowment policy

Insured-related (Policyholder) factors: Current life stage; age; individual needs; income; risk appetite; savings, investment, and long-term financial objectives.

Insurer-related (Company) factors: Premium rates, customer service track record, bonus payment track record, bonus rates (translate into a simple ROI to measure the relative worth of the plan), claim settlement ratio, reputation, and financial standing.

It is prudent to pick an endowment plan that is simple and easy to comprehend. Policies with complex features and benefits should be avoided. It is advisable to read the insurance document very carefully before committing to avoid missing any catch in the fine print.

Concluding

If you want a policy that offers more than just life cover, an Endowment Plan is your best bet. The triple benefits of long-term wealth creation, insurance coverage, and regular goal-based savings make these plans the right choice for people belonging to any age group, irrespective of their saving capabilities. Even though endowment plans may offer lower returns, they are much safer and guarantee that one’s investment and insurance needs are well taken care of under a single plan.

An endowment plan is a saviour during a financial crisis - an excellent channel to assure financial support and security to one’s family at present and in the future.