Endowment plan is a type of Life Insurance Policy which offers not only insurance, but also an opportunity to save regularly and earn returns. Part of the premium is kept for life cover (Insurance) and the rest is invested by the Insurer (Savings). Upon maturity, a lump-sum is paid-out to the policy holder, provided he survives the term of the policy. In the event of his demise before maturity, his nominees will receive death benefit, which is the sum assured and the profits from investment. Endowment Policies provide an opportunity for individuals with low risk appetite to earn profits from investment.
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Survival Benefits - An endowment plan not only covers the life of the holder, but also pays out a lump-sum if the holder survives till maturity.
Premium Payment - Premium payment can be monthly, quarterly, bi-annual, or annual. The holder can choose the frequency of premium payment and type of policy.
Returns - If a person wants to accumulate wealth for the future and secure the livelihood of his family at the same time, endowment plan is a good option. The survival benefit and death benefit are higher than regular life insurance policies.
Riders - Add-ons, also called riders can be taken at a slightly higher premium to increase the scope of the policy. Critical illness, total permanent disability, accidental death are some of the riders that can be taken. Some plans have the facility of waiver of premium in case of total permanent disability or critical illness.
Bonus- Bonus is a non-guaranteed benefit of endowment plans that is available only for holders of “Policy With-Profit”. If the insurance company is performing well in terms of its investments and earns profits, it can distribute a part of the profits by declaring a bonus. This amount is paid out at maturity of the plan or death of the holder. The two main types of bonus are Revisionary Bonus and Terminal Bonus.
The bonus keeps getting added to the policy and keeps accumulating till maturity or death. Once the bonus is added, it cannot be withdrawn. It is paid out of the profits of the insurer.
It is a one-time bonus that is added to pay-out at maturity or death of the policy holder.
Paid-up Policy - if the holder wishes to stop premium payment but does not want to terminate the policy, he can convert it into a paid-up policy. A policy where the holder has no premium obligations and the policy stays intact till maturity or death of the holder is called paid-up policy. Sum assured in this case will not be 100% of the original, but rather, a proportion of premiums already paid to total number of premiums payable. For example, a policy has sum assured Rs 15,00,000 and maturity of 25 years, with annual premium payment of Rs 16,000. If the holder has paid premium for 12 years and then converts it to paid-up policy, the revised sum assured will be: (15,00,000* 12⁄25) = Rs 7,20,000.
Surrender of Plan - Surrender of plan means terminating the policy. At the time of surrender, an amount known as Surrender Value will be paid to the person, which depends on the number of years completed, the premium and the bonus. Surrender Value is of two types – Guaranteed Surrender Value and Special Surrender Value. A person is eligible to receive the guaranteed surrender value, if he has paid premium for at least 3 years. It is calculated as 30% of the basic premiums paid excluding additional riders, first year premium, and bonus.
Special Surrender Value is calculated by adding bonus to the paid-up value and multiplying the total with a multiplier called surrender value factor.
Special Surrender Value = [(Paid up value+Bonus)X Surrender value factor]
The surrender value factor is zero for the first 3 years of the policy and keeps increasing after 3 years. It is different for each insurance company and depends on various factors like policy type, policy years, premium paid, and time to maturity and so on.
1. Full / With-Profit Endowment Plan
Under this plan, the basic sum assured will be provided to the holder as guaranteed return. The final pay-out, however, is higher than the sum assured, as bonus is declared from time to time by the company which is added to the sum assured and paid out as part of maturity benefit or death benefit.
2. Endowment Plan Without Profit
This plan does not take part in the profits of the insurer. Therefore, the only return to the policy holder is the sum assured. The company may offer other benefits like lower premium as the holder does not get any bonus.
3. Unit Linked Endowment Plan
Unit Linked Policies allow the policy holder to choose where he wants to invest premiums. The premiums are distributed across multiple units which are held under specific investment funds.
4. Low Cost Endowment Plan
Specifically designed to allow holders to accumulate funds in order to meet future financial obligations like mortgage, marriage and so on.
Endowment Plans offer policy holders the dual benefit of insurance and a disciplined way of saving for future needs. Should anything unexpected befall the holder, beneficiaries are not financially affected. Though the returns may not be as high as direct investments in stock markets and mutual funds, the risk factor is low and the sum assured is guaranteed, so the holder need not worry about his investment. Endowment Plans usually have a maturity of 10 - 40 years, giving the policy holder long term savings, and if the insurance company declares a bonus it is added to the proceeds distributed at maturity or death. One of the major benefits is the tax exemption that can be claimed under Sections 80C and Section 10(10D).
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Before purchasing an Endowment Plan, it is important to plan ahead. Planning must be done as early in life and career as possible. Understand the objective of taking the plan, personal financial condition and so on before purchasing a policy.
Explore all the options that the insurer makes available to the purchaser. Quantum and frequency of premium payment, riders to the policy, bonus and so on are all different between insurers.
An important thing to do is check the company’s track record and bonus history. Understand the company’s past performance, and if want to opt for ‘with-profit policy’, look into the bonus declaration records of the insurer.
Every endowment plan has two types of returns, guaranteed and non-guaranteed. Apart from the insurance and savings, many companies offer non-guaranteed returns in the form of bonus. Since both as a whole form total return, compare different insurers to know where you can get higher returns.
How easy is it to get claims settled, and what are the conditions involved are some important details that should be clear. Go for plans which are simple to understand, and avoid complex features as there may be things that you won’t understand. Opt for an insurer who has claim settlement ratio over 90.
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