Jul 13

Endowment Plans in India

Team Antworks

A traditional insurance plan pays out a lump sum assured in the event of the death of the policyholder. The beneficiaries/dependents/nominees of the life insured receive a benefit (called a death benefit) if the worst should come to pass for the insurance holder. An endowment plan works the same way, but has an additional clause that states that a lump sum payment will be made to the insurance holder if he or she survives till the end of a specified period known as the “maturity period”, “endowment policy term” or “survival term”. There are variations to the payout clause in endowment policies – some companies have a lump sum payout on the detection of a critical illness, or other life changing events.

Key Features of Endowment Policies:

Sum assured in an endowment policy is payable either on survival to the term or on death occurring within the term.
Endowment policies are available as ‘With Profit’ and ‘Without Profit’ plans.
Under Endowment policies, bonus for the full term is payable on the date of maturity or in the event of death, whichever is earlier.
Premiums for endowment policies can be limited to shorter term or can be paid as single premium.
Premiums cease on death or on expiry of the term, whichever is earlier.

Benefits of Endowment Policies:

Endowment policies carry plenty of benefits, a few of which are listed below:

An endowment policy will provide insurance cover during the policy term.
An endowment policy will pay out a sizeable lump sum amount at the end of the policy term i.e. once the policy has matured.
An endowment policy works to serve a dual purpose. Not only does it work as an insurance policy but also serves as a long-term investment offering decent returns.
Endowment policies come with tax benefits.
In terms of investing, endowment policies are relatively safer than other types of investments and offer returns which are close to those offered by mutual funds.
Endowment policies enable long-term savings.
With an endowment policy, you can be assured of receiving a considerable amount upon maturity.
Most endowment plans will extend insurance coverage and the promise of benefits even after the maturity date, in some cases up to a time when the life insured attains the age of 100.
Policy holders have the options of opting for additional riders which provide cover for specific illnesses, critical illnesses, disabilities, etc.

How Do Endowment Policies Work?

Endowment policies are not very different from regular insurance policies. These policies, like insurance policies, not only provide cover to the life insured, but also help them save regularly over a specific period of time. Once the policy has matured and given that the policy holder has survived the policy term, they will receive a lump sum maturity amount which can be utilized for meeting financial needs like purchasing property, children’s education, organizing a wedding or preparing for one’s retirement.

Are endowment plans for you?

The decision to take on an endowment plan must be well thought out and its benefits, returns on investment, etc. must be compared against those of similar investments.

If you are a healthy individual in need of life insurance cover and an investment that helps you save on tax in addition to giving you huge returns, you may choose to opt for a combination of financial products, or opt for a single endowment plan which does the same thing.

You may purchase a life insurance policy and invest in a separate mutual fund, etc. and expose yourself to the risks involved in a mutual fund investment. It’s quite ideal for those with a high risk appetite. For those who find that their life savings are too valuable to leave to chance, an endowment life insurance policy is ideal.

An endowment policy is far less risky than a mutual fund investment, and also has ULIP options which invest in various equity and debt schemes. In addition to being a tax saving investment with guaranteed returns at the end of the term, it also provides comprehensive life insurance cover – which is a win-win situation for the investor (and his dependents).

There are arguments against endowment plans because the returns on investment are not as high as those offered by mutual fund, equity and debt related investments of similar amounts for similar tenures. Purchasing two separate financial products – one for a life insurance policy and one for a product directed to give you returns on investment will pay off better with a higher percentage of returns. That being said, it must be noted that while there are better options for returns on investments, endowment policies are first and foremost insurance policies. They just have the added benefit of giving you a return on the premium you’ve invested – on plan maturity.

Consider your risk appetite and requirement for life insurance cover before taking any major financial decision.

Types of Endowment Policies:

There are 3 types of basic endowment policies which one can choose from.

Unit Linked Endowment – Under Unit Linked policies, the insurance premiums are directed into multiple units held under a specific investment fund which can be chosen by the policyholders.
Full Endowment – Under this policy, the basic amount ensured to be provided will be equal to the death benefit, right from the start of the policy. Depending on the speculated market-based appreciation, the final payout provided is comparatively higher.
Low Cost Endowment – This endowment plan has been introduced with the intention of allowing individuals to accumulate the funds which have to be paid after a specified time period, usually mortgage.

How to Choose an Endowment Policy?

Just like other insurance plans, the market is now flooded with different types of endowment policies. There are several factors which come into play, when it comes to choosing the right endowment insurance policy. Individual needs, current life stage, income and risk appetite are just a few factors to consider. Given that the premiums of endowment plans are pricier as compared to term plans, cost of premiums is also a deciding factor. After premium costs, another crucial factor to keep in mind is the insurance provider’s track record in terms of the bonus payments. Beside these, some other factors to keep in mind would be the customer service provided by the insurer, their claim settlement ratio, financial status of the insurer, etc. when choosing an endowment policy, pick one which is simple and does not come with features and benefits which are difficult to comprehend and the finer details of the policy may get lost in the fine print.

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.
Medical reports (only if required).

Endowment Policy Premium Calculator:

With the Endowment Plan Premium Calculator you can know the details like Premium amount, maturity value, surrender value, loan value and returns of the Policy. Endowment Policy Premium calculators will ask you to input information like your age, policy term and amount of sum assured. Using this information, the calculator will compute the premium which you will be required to pay towards your endowment policy.

Riders For Endowment Policy:

Most endowment policies offer add-ons to enhance the protection provided by the policy. Some of the riders commonly available with endowment policies are as follows.

Critical illness
Waiver of premium
Accidental death and dismemberment
Accelerated sum assured
Partial and permanent disability
Hospital cash

Some Popular Endowment Plans In India:

Reliance Endowment Plan

Sum Assured plus vested bonuses on maturity, subject to 100.1% of premiums paid.
Death benefit of 10 times the annualized premium or base Sum Assured plus vested bonuses. Either that, or 105% of all premiums paid.
Policy term from 10 – 25 years.
Loan against policy available

Kotak Classic Endowment Plan

A participating endowment plan providing coverage up to 75 years of the life insured.
Yearly bonuses applicable from the first year.
Wide range of term options.
Tax benefits under Section 80C and 10(10D) of the Income Tax Act, 1961.
Riders available to enhance protection.

Kotak Premier Endowment Plan

Receive 5% p.a. (simple) of basic Sum Assured as Guaranteed Additions during the first 5 policy years.
Bonuses accrue from the 6th policy year onwards.
Regular or limited premium paying term for 5, 7, 10 or 15 years for different term combinations.
7 additional riders available.

LIC New Endowment Plan

Minimum sum assured of Rs.1,00,000.
Death benefit no less than 105% the total premiums paid.
Death benefit is the higher of basic Sum Assured or 10 times the Annualized premium.
Accidental death and disability rider available.