The endowment policy is a variant of a life insurance product that not only provides insurance coverage to the family of the insured but also works as a savings plan to create a financial cushion for the family in the long term. As a remunerative option of investment, the endowment insurance plan helps to accumulate wealth in the long term, in order to achieve the financial objectives in life.
In this blog, we will talk about what is the endowment insurance policy and why you should consider having it in complete detail.
Understanding Endowment Life Insurance Policy
Endowment life insurance is a type of life insurance policy that combines a death benefit with a savings or investment component. It provides both protection for the policyholder’s beneficiaries in the event of their death and the opportunity to accumulate cash value over time.
Endowment life insurance policies offer a combination of protection and savings, making them appealing to individuals who want life insurance coverage but also desire to build up a cash reserve that can be used for various purposes. The cash value can be utilized for expenses such as education, retirement planning, or other financial needs during the policyholder’s lifetime.
It’s important to note that endowment policies tend to have higher premiums compared to term life insurance due to the savings component and the guaranteed payout at the end of the term. Additionally, the returns on the investment portion may vary depending on the performance of the underlying investments and the insurance company’s policies.
How Does Endowment Plan Work?
An endowment plan is a type of life insurance policy that provides both a death benefit and a savings component. It combines elements of insurance coverage with a long-term savings strategy. Here’s how an endowment plan generally works:
- Policyholder selects the policy: The individual interested in an endowment plan chooses the desired coverage amount and the duration of the policy. The coverage amount determines the death benefit paid out to beneficiaries upon the policyholder’s death.
- Premium payments: The policyholder pays regular premiums (monthly or annually) to the insurance company. These premiums are divided into two portions: one portion covers the cost of insurance, and the other goes towards savings or investments.
- Death benefit: In the event of the policyholder’s death during the policy term, the designated beneficiaries receive the predetermined death benefit. This payout provides financial protection for the policyholder’s loved ones.
- Cash value accumulation: A portion of the premium payments is allocated towards building up a cash value component within the policy. The insurance company invests these funds on behalf of the policyholder. The cash value grows over time, typically on a tax-deferred basis.
- Maturity benefit: Unlike term life insurance, an endowment plan has a fixed term, which can range from 10 to 30 years or more. At the end of the policy term, if the policyholder is still alive, they receive the accumulated cash value as a lump sum. This lump sum payout is known as the maturity benefit.
- Surrender value and withdrawals: In some cases, if the policyholder decides to terminate the policy before its maturity, they may receive a surrender value. The surrender value is the amount accumulated in the cash value component of the policy, minus any applicable charges. Additionally, some endowment plans allow policyholders to make partial withdrawals or take policy loans against the cash value during the policy term, providing access to funds for various financial needs.
Endowment plans are often marketed as a combination of insurance and savings, appealing to individuals who seek both protection and a savings element. They provide a disciplined approach to savings and offer a guaranteed payout either upon the policyholder’s death or at the end of the policy term.
Benefits of Endowment Insurance Plan
The endowment policy not only offers the advantage of insurance coverage plus savings under the same plan but there are several other benefits offered by the policy. let’s take a look at these benefits in detail:
- Disciplined Savings: In an endowment plan, a part of the premium paid by the insured is kept aside by the insurer as savings, which are accumulated at the end of the policy tenure. This helps the policyholder to inculcate a habit of a disciplined approach towards savings.
- Assured Bonus: Annual bonuses are declared under the endowment plans, these are typically paid out as a specific percentage of a sum assured to the policyholder. In case the life assured survives the entire tenure of the policy, then a total sum assured amount as maturity benefit along with guaranteed additional bonus is paid to the life assured at the end of the policy tenure. Similarly, in case of the demise of the policyholder, the total sum assured amount is paid to the nominee of the policy as a death benefit along with the guaranteed additional bonus.
- Compounding Returns: One of the major advantages offered by the endowment policy is that it offers compounding returns during the policy tenure.
- Loan Facility: The policyholder can avail loan against an endowment policy after completion of the certain policy tenure.
- Tax Benefit: The insurance holder can save on taxes on the premium paid towards the policy and the maturity proceeds under Section 80C and 10(10D) of the Income Tax Act.
- Premium Flexibility: The insurance holder has the flexibility to pay the premium of the policy in monthly, quarterly, yearly, or half-yearly mode. Moreover, they can also choose the option of single premium payment, regular premium payment, or limited premium payment as per their requirement and suitability.
- Additional Rider Benefit- Along with the basic benefits offered by the policy, the plan also offers the option of riders. The policyholder can buy any of the rider options available under the policy to enhance the coverage of the policy.
Who Should Buy an Endowment Insurance Policy?
An endowment plan is a type of life insurance policy that provides both a death benefit and a savings component. It combines elements of insurance coverage with a long-term savings strategy. Here’s how an endowment plan generally works:
- Policyholder selects the policy: The individual interested in an endowment plan chooses the desired coverage amount and the duration of the policy. The coverage amount determines the death benefit paid out to beneficiaries upon the policyholder’s death.
- Premium payments: The policyholder pays regular premiums (monthly or annually) to the insurance company. These premiums are divided into two portions: one portion covers the cost of insurance, and the other goes towards savings or investments.
- Death benefit: In the event of the policyholder’s death during the policy term, the designated beneficiaries receive the predetermined death benefit. This payout provides financial protection for the policyholder’s loved ones.
- Cash value accumulation: A portion of the premium payments is allocated towards building up a cash value component within the policy. The insurance company invests these funds on behalf of the policyholder. The cash value grows over time, typically on a tax-deferred basis.
- Maturity benefit: Unlike term life insurance, an endowment plan has a fixed term, which can range from 10 to 30 years or more. At the end of the policy term, if the policyholder is still alive, they receive the accumulated cash value as a lump sum. This lump sum payout is known as the maturity benefit.
- Surrender value and withdrawals: In some cases, if the policyholder decides to terminate the policy before its maturity, they may receive a surrender value. The surrender value is the amount accumulated in the cash value component of the policy, minus any applicable charges. Additionally, some endowment plans allow policyholders to make partial withdrawals or take policy loans against the cash value during the policy term, providing access to funds for various financial needs.
Endowment plans are often marketed as a combination of insurance and savings, appealing to individuals who seek both protection and a savings element. They provide a disciplined approach to savings and offer a guaranteed payout either upon the policyholder’s death or at the end of the policy term.
It’s important to carefully review the terms, premiums, death benefit, cash value growth, and any associated fees or charges before selecting an endowment plan. Consulting with a financial advisor or insurance professional can help ensure the policy aligns with your financial goals and needs.
Also Read: Make Your Insurance Premium Payment Online
The Bottom Point!
An endowment life insurance policy is a type of life insurance that offers a combination of protection and savings. It provides a death benefit to beneficiaries in the event of the policyholder’s death, as well as a cash value accumulation component that grows over time. The cash value can be accessed at the end of the policy term as a maturity benefit.
Endowment policies are attractive to individuals who desire life insurance coverage while also aiming to build up savings or investment funds. They offer a disciplined approach to saving and provide a guaranteed payout, whether it is upon the policyholder’s death or at the end of the policy term.
It’s important to consider factors such as premium costs, policy terms, cash value growth, and the specific needs and financial goals of the individual before opting for an endowment policy. Consulting with a financial advisor or insurance professional can provide valuable guidance in selecting the right policy that aligns with one’s overall financial plan.
What is the main difference between an endowment policy and a term life insurance policy?
How is the cash value of an endowment policy determined?
Can I withdraw money from the cash value component before the policy matures?
Are endowment policies tax-deductible?
Is the death benefit from an endowment policy taxable?
Can I convert my endowment policy into another type of life insurance policy?
What happens if I surrender my endowment policy before maturity?
