Endowment Policy combines the risk cover with financial savings; endowment policies are the most popular policies in the world of life insurance.
In an Endowment Policy, the sum assured is payable even if the insured survives the policy term; if the insured dies during the term of the policy, the insurance firm has to pay the sum assured like any other pure risk cover. A pure endowment policy is also a form of financial saving, whereby if the person covered survives beyond the tenure of the policy; he gets back the sum assured with some other investment benefits.
In addition to the basic policy, insurers offer different benefits such as double endowment and marriage/ education endowment plans. The cost of such a policy is relatively higher.
Different Types of Endowment Policy
The two different types of endowment insurance policies are as follows
In this type of insurance policy the insurer prefers a combination of options to invest his/her premiums. Some of them will be invested in financial instruments like shares, debentures and fixed deposits schemes of commercial banks while the others would be invested in purchasing an asset and the like. The premium amount of endowment insurance policies are at par with life insurance price.
One can claim a particular amount from the policy if they have met the minimum premium conditions. In case the policy holder’s premiums perform well in the market (in the form of investment) the surplus amount will be accumulated to his/her policy and thereby increases its face value. This amount cannot be misrepresented after it is declared to add them. These additions can come in handy to save or at least cut the policy holder’s loss in the event of created due to fluctuations in the stock market provided the money is invested in the stock market.
This policy is losing its attractiveness due to the facilities given by the next category namely unit linked. This policy provides better return that with profit policy. Under this policy the policy amount is to be employed after the death of the insured. As per this policy the profits that come by way of the insured's investment is transformed into units of the investments. The number of additional units and the extent to which they increase the profits are also brought to the customer’s knowledge.
If the insured succeeds in paying all the premiums without any fail the company also credits the insured’s account with additional benefits. These benefits can at times be very high depending on the customer’s policy duration. In case of policies that have a long duration the additional amount is substantial and equals a big portion of the policy amount itself.
Low-Cost Endowments and Endowment Mortgages (Own Cost Policy)
This type of policy includes the characteristics of a life insurance policy and an endowment savings plan. As the name mentions the objective of this policy is to repay the debts incurred due to a mortgage. The idea is to ensure that sufficient amount is available to repay the whole amount of debt incurred in a mortgage after a specific period of time. It is also to be understood that the customer should continue to pay the interest of the mortgage simultaneously while paying the insurance premiums. They will also be able to claim income tax exemption if they have excess cash even after repaying the mortgage. The policy holder has to arrange for funds to pay the mortgage if the money recouped is not sufficient to cover the same.
The insurance company will not accept any responsibility to pay any amount above the policy value whether or not you repay the mortgage. This factor and the steep decline in interest rates are considered to be serious drawbacks for this policy. By and large the policy has already lost its charm for these reasons. However many insurance companies have started of a practice requesting employees to pay an increased premium if the market rate predicts that the current premium will not be sufficient to repay the mortgage. Since life insurance price have come down drastically consumers have started to dislike this when compared with affordable life insurances.
Closing an Endowment Policy
Customers have an opportunity to make more money while surrendering their insurance policy if their policy has been in existence for a couple of years. There are lots of dealers in the secondary market who will help the customers to get a decent price. However for practical reasons like probability of getting a lower return it is advised not to surrender the policy unless they are inevitable.
The need of an endowment insurance policies or a life insurance policy depends on the financial needs of the customer and the risks involved. One can seek the advice of chartered accountant or a tax practitioner to know more details. Most of the insurance companies offer affordable life insurance plans. An insurance agent will also able to suggest a suitable endowment policy.