An endowment plan is a twin benefit plan of insurance and investments. This is similar to any dual use product such as a Multi utility vehicle which can be used for city traffic as well as on rough ground and on long rides.
The endowment plan is unlike a term plan which is a pure survival plan and there are no survival benefits.
You have to pay a premium in order to avail the benefits of endowment plan. These endowment policies have a maturity date (The date on which the policy matures).
If you die before the policy matures then you get only the sum assured. The endowment gives you a guaranteed bonus (a fixed % of the sum assured) for the first five years of the policy.
You also have a revisionary bonus paid out of the profits of the policy. This amount is paid to you only if the Insurer has a profit. No profits for the Insurer means no revisionary bonus.
The endowment policy pays a terminal bonus at the end of the policy .This is obtained on the maturity of the policy.
So how does an endowment policy work?
If you die before the maturity of the policy you get only the fixed amount called the sum assured. As you live longer you get bonuses and if you survive the maturity period you get a maturity amount . (This is the sum assured + Bonuses).
These policies invest in fixed income securities to give you a steady return over the life of the policy.
How much will you get if you surrender the endowment policy?
If you surrender the policy within 3 years you will get 30% of the premiums you have paid in the three years minus the first year’s premium. Yes the full premium you have paid in the first year is deducted as a cost/expense.
What is the paid up value of an endowment plan?
You have a sum assured in an endowment policy.
You have taken an endowment plan for a fixed number of years or a term called maturity period.
You pay premiums only for a certain period and then discontinue paying the premium.
You have taken an endowment plan for 10 years and you have discontinued the policy after paying only 3 premiums instead of 10 premiums.The sum assured is INR 5 Lakhs.
Paid up value of a policy = Premiums you have paid / Premiums you have had to pay * Sum assured.
Paid up value = 3 / 10 *500000
Paid up value of the policy = INR 150000.
Your policy continues with a lower sum assured.
The premiums you have paid are tax deductible as per Section 80 C of the income tax act. The maturity amounts are tax free as per Section 10 10(d) of the income tax act.
Why do insurance agents sell endowment polices?
These agents get a huge commission when they sell traditional life insurance policies such as endowment polices. The premiums charged are huge and commissions are paid to the insurance agents from these amounts.
If you surrender the policy after 3 years you will lose your first years premium and get only 30% of the amounts on the second and third year premiums you have paid.
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