What is an Endowment Plan?
An endowment plan is another subset of traditional life insurance plans that works in two ways to secure your future. A part of the premium that you pay goes towards a life cover and the other helps to build a savings corpus. If the life assured passes away, the nominee gets the sum assured as death benefit. But if the life assured survives, they receive the maturity benefit component of the plan.
There are different types of endowment insurance plans you can choose from depending on how much your risk appetite is and what your specific financial needs and goals are in life.
Different Types of Endowment Plans
There are several types of endowment insurance available in India. While all of them give the same combination of overarching benefits, they do differ based on their profit participation, structure of bonus (if declared), and investment strategy.
Participating Endowment Plans
When you opt for Participating Endowment Plans, you’re entitled to a sum assured that’s credited at the end of the policy term or in the event of your untimely demise during the policy tenure.
With the cumulative annual bonuses, if any, earned during the policy tenure and the growth of your investment, the maturity benefits from such plans tend to be higher than the initial sum assured under the plan. Thus, you can finance your children’s education or your own retirement with the accumulated wealth from such types of endowment policies.
Non-Profit Endowment Plans
As the name suggests, you earn no profits with such types of endowment policies as insurers don’t offer additional bonuses on the initial sum assured. When you buy such types of endowment life insurance policies, you are only promised a certain lump-sum payment.
This predetermined benefit amount is paid to you on maturity, or the death benefit will be paid to your listed nominee if anything untoward happens to you before the policy tenure expires. While such policies lack the additional wealth-building benefit, they sure do serve as prudent safety nets for your family, helping them maintain financial stability when going through tough times.
Unit-Linked Endowment Plans
These types of endowment life insurance policies are fixed-term schemes, where your premiums are used to buy units of market-linked investment funds. These policies also provide you with a life cover that can help sustain your family in the event of your untimely demise.
However, since such plans are market-linked, the returns that you stand to derive from them will be based on how well the underlying funds perform and other market conditions. For instance, if the market keeps rising, your returns may also keep growing if the fund also generates positive returns, however, if the markets plummet, it can impact the underlying fund and consequently your investment. Thus, you may consider opting for such plans only if you have a high-risk tolerance threshold.
Non-Participating Endowment Plans
Non-participating endowment plans are also called “without-profit” plans, and they offer a fixed maturity amount or a death benefit. These plans don’t pay bonuses, but the guaranteed* payout gives clarity and a sense of security about the amount you or your family will receive.
Important Features of Endowment Plans
The following features makes endowment plan a good option to consider:
Life Cover with Savings
All types of endowment policy options come with a definitive life cover aspect along with disciplined savings. If you pass away, your nominee receives the life cover amount as death benefit, making sure that they’re financially supported even after your death.
Guaranteed* Maturity Benefits
Endowment plans offer fixed maturity benefits of sum assured and bonus if declared decided at the time you purchase the policy. These payouts can help you meet future financial goals like your child’s higher education, buying a house, or planning for retirement without financial stress.
Flexible Premium Payment Options
You can choose how you’d like to pay your premiums. Be it monthly, quarterly, half-yearly, annually, or even as a single lump sum payment.
Flexible Payout Options
Just like how you can choose to pay your premiums, you can also choose the way you receive the maturity amount. You can opt for a lump-sum payout or choose periodic payouts .
Returns Are Low-Risk
These plans are not market-linked, which makes them a low-risk option. Your returns remain steady and unaffected by market volatility, giving you peace of mind as your savings grow.
Benefits of Endowment Plans
Build Wealth While Staying Protected
Endowment plans let you save consistently while also giving your family a safety net. In the event of your demise during the policy, your loved ones will receive the sum assured along with any bonuses. However, if you live past the term, you receive a maturity payout.
Clarity and Certainty on Returns
Endowment policies lock in the sum assured at the start. You’ll know exactly what you’ll receive at maturity, making it easier to plan for long-term goals like retirement or funding your child’s education .
Strong Financial Support for Your Family
The life cover offered by endowment plans makes certain that your family is financially secure even after your death The payout, which can include the base cover plus any bonuses (if declared), helps cover expenses and maintain their lifestyle during difficult times.
Tax Relief on Premiums and Benefits
The premiums you pay for endowment plans can be claimed as deductions under Section 80C (old tax regime), reducing your taxable income. Plus, the maturity and death benefits are typically exempt from tax under Section 10(10D), adding to the plan’s overall value.
Extra Growth Through Bonuses (if declared)
Participating endowment policies may offer bonuses( if declared )by the insurer. These bonuses are not guaranteed but can significantly increase the final payout at maturity, helping you grow your savings faster.
Summing It Up
Since there are different types of endowment plans available in the market, it is preferable to first assess your own life goals and risk appetites before proceeding to buy an endowment policy. If your goal is to secure the financial future of your loved ones, opting for a profit or non-profit endowment plan may be prudent.
However, if you’re ready to test the market waters and have a high-risk tolerance threshold, you can opt for a unit-linked endowment plan. The bottom line remains that higher returns may come with sizable risks. Thus, you must evaluate endowment plans accordingly.
Key Takeaways
- Endowment plans have dual benefits, combining traditional life insurance with guaranteed* savings.
- There are several different types of endowment policy for you to select as per what suits your purpose in life.
- Endowment plans are suitable as a long-term investment tool.
- The settlement benefits and maturity benefit both offer several options for payments, like lump-sum or staggered payments.
- You can save on taxes under Section 80C of the old tax regime and Section 10(10D) of both old and new tax regimes.
FAQs
How does a with-profits endowment plan work?
A with-profits endowment plan offers a guaranteed* sum assured, but it also adds bonuses (if declared ) by the insurer each year. These bonuses (if declared) are linked to the company’s profits and are compounded over the policy term. This means your payout at maturity or death will likely be higher than the original sum assured, making it a stable way to build wealth.
What distinguishes unit-linked endowment plans from traditional ones?
Unit-linked endowment plans invest your premiums into market-linked funds, so your returns can fluctuate depending on market performance. Traditional endowment plans, on the other hand, offer guaranteed* payouts and are less risky.
Who can be considered for a full endowment plan?
A full endowment plan is best suited for individuals who want steady and predictable wealth creation over the long term. It can be suitable for those planning for big goals like funding their children’s education, building a retirement corpus, or leaving a legacy for loved ones while ensuring life insurance coverage.
