Recognise The Concept Of Endowment Plans
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Since an endowment policy is similar to a life insurance policy, giving the combined benefit of both, insurance coverage and savings, their plans assist the insured to save regularly over a particular period of time to obtain a lump-sum amount at maturity. In case the insured survives the entire tenure of the policy, the maturity amount is paid. However, unfortunately, if the insured is demised during the policy tenure, the sum assured amount as death benefit along with a bonus (if any) will be paid to the beneficiary of the policy. Finally, another positive aspect of an endowment policy is that it even helps to form a financial cushion for your future so that you can meet the long-term and short-term financial objectives of your life.
Types Of Endowment Plans
The various types of endowment policies are as follows:
Unit Linked Endowment Plan- This fixed-term saving plan provides life coverage, and the premiums paid by the insured are bifurcated into various units held under a particular investment fund as selected by the insured person. The returns on investment are entirely dependent on the fund's market performance. This plan is suitable for those who have a high-risk appetite and desire to gain higher returns on investment.
Full/With Profit Endowment- In this type of plan, the insured person receives the basic sum assured amount that's equal to the death benefit. Right from the start of the policy, this amount is guaranteed, and the final payout that is paid to the insured is comparatively higher. This is so because it includes the total sum assured amount plus an additional bonus.
Low-Cost Endowment- These types of endowment plans are invented to assist the insured to accumulate a fund for the future, which is to be paid after a particular time. Generally, these low-cost endowment plans are used for making repayments of mortgages, loans, etc. If the insured demises during the policy term, the target amount will be paid as a minimum sum assured to the beneficiary of the policy.
Non-profit Endowment- In a non-profit traditional endowment policy, the sum assured amount gets paid to the policyholder as a maturity benefit or to the policy's beneficiary as a death benefit.
Guaranteed Policy- Endowment insurance policies guarantee a sum of money will be provided to the individual or its beneficiaries whether the individual lives until the insurance policy matures or it dies early. The endowment policy's face value will be provided to the policyholder on the "maturity date" or to the life insurance policy's beneficiary when the insured passes away. Since the bonuses under the policy are not guaranteed, hence, with endowment policy one gets a dual advantage of guaranteed policy benefits along with non-guaranteed bonuses.
Features of Endowment Policies
The following are the salient features of the endowment policy:
Death and Survival benefits: The nominee and/or the beneficiary receives the sum assured along with bonuses if the insured demises before the maturity of the policy. Moreover, the insured is entitled to receive the sum assured if it outlives the policy.
Higher returns: An endowment plan provides financial protection to the policyholder's family and dependents in case of the unforeseen demise of the insured and helps build a corpus for the future. Be it survival benefit or death benefit, an endowment plan's payout may be much higher than a pure life insurance policy.
Premium Payment Frequency: Policyholders are allowed to make regular, single, or limited payments of the premium based on the policy taken by them. They can also wish to pay on a yearly, half-yearly, quarterly, or monthly basis.
Flexibility in Cover: Policyholders have the option to add riders, such as total disability, critical illness, and accidental death, to their plan and enhance their life cover. In case of permanent disability or critical illness, some plans also provide premium payment waivers.
Tax Benefits: The policyholder obtains tax exemption on the premium payments as well as on the maturity or final death payouts under Section 80C and Section 10(10D).
Low Risk: Endowment policies are known to be safer when compared to other investment plans such as mutual funds or ULIPs because the amount isn't invested directly in the stock market or equity funds.
Under What Circumstances Should One Buy An Endowment Policy?
As a part of the portfolio, everyone desires risk-free and guaranteed returns on their investments. Therefore, endowment plans are suitable options for individuals who desire to protect their family and dependents financially and build a corpus for fulfilling their investment objectives for a longer period. However, do bear in mind that such regular premium plans should only be purchased if the insured has a steady flow of earnings as it will aid him/her in paying the premiums regularly. These plans possess long-term nature, hence, the longer the term of the policy, the total benefit will be better. Hence, those who have an irregular income might opt for single pay or Flexi pay plans, instead of the regular payment endowment plans.
Why should an Individual buy an Endowment Policy?
An individual should buy endowment policies because they provide a disciplined habit of saving money for future requirements. An additional advantage of opting for such a policy is that it offers life risk coverage that helps the policyholder's family and other dependents in troublesome times such as when the policyholder passes away. Although it may appear the returns are lesser, the positive fact is that they are risk-free in case of a certain sum assured. You can also receive tax benefits subject to some conditions. For this reason, risk-averse investors prefer purchasing endowment plans. Apart from providing a life cover to the insured in an unforeseen event, these policies also give the maturity amount to the policyholder if it survives the policy term.
Conclusion
Endowment plans act as a disciplined route for individuals to build a corpus, that can later assist the dependents of the insured if any financial contingencies occur. Salaried individuals, small businesspersons, and professionals such as lawyers and doctors should purchase endowment plans to meet their long-term financial goals. Moreover, these plans are ideal options for those who do not mind obtaining fewer returns and are risk-averse. Alternatively, endowment policies are observed to be for the common mass rather than for those individuals belonging to the super-rich class.
Also read: Look For An Endowment Plan To Assist You In Growing Your Savings.
