• Life Insurance
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When it comes to life insurance plans, across the generations, our grandparents and parents have been absolutely diligent about purchasing one. The idea is simple: when the policyholder passes away, the sum assured of the life insurance plan should act as his/her income replacement and thus ensure that the loved ones stay financially secure to achieve their life stage goals.
However, as time passed, potential policyholders sought more from theory policies - they were looking towards savings, cash value, dividends, returns, and protection from single financial products. Subsequently, multiple new types of life insurance policies surfaced, including - endowmnet plans.
Over the past few years, endowment policies from the top life insurance providers have gained immense popularity. While they are relatively more expensive than the standard term insurance policies, they are less costly than ULIPs and come with cash value. However, this type of life insurance policy comes with its own set of caveats, which makes it extremely important to think about whether this type of life insurance plan can be the most suitable financial channel for you.
Let’s take a quick look at the details of endowment life insurance policies, their pros and cons, functionality, and components, and see if term insurance policies are a better alternative!
Endowment life insurance policies combine insurance with a savings component. Here's how they work:
The insurance company invests the cash value of the policy, which you can borrow against or withdraw, much like a savings account. So, an endowment policy is a savings plan with added life insurance. You pay regular premiums over a set period, which can be between 5 to 30 years. At the end of this term, you get a lump sum payment, known as the maturity value. If you pass away before the term ends, your beneficiaries receive a death benefit, usually exceeding the premiums paid.
Heads Up: It takes an average person up to 5 hours to read & analyze a term life policy, and 10 hours or more to compare different plans and make a decision.
This is why we propose a better alternative - taking a 30-minute FREE consultation with Ditto’s certified advisors. We have a spam-free guarantee, and we’ll never push you to buy a plan. Don’t delay this - we have limited slots daily, so book a quick call here before they run out.
How do Endowment Policies work?
Endowment policies blend life insurance with a savings component. When you take out an endowment policy, you agree to pay premiums for a set period, typically 10 to 25 years. The insurance company invests part of these premiums, growing the policy’s cash value.
At the end of the term, you receive the accumulated cash value plus the death benefit, which is usually a multiple of the policy’s face value. If you pass away before the term ends, your beneficiaries receive the death benefit.
Premiums can be paid monthly, quarterly, semi-annually, or annually, based on your preference. Endowment policies also offer flexibility—you can add extra coverage like critical illness or disability for an additional premium, borrow against the cash value, or surrender the policy for its cash value if you no longer need the coverage.
What are the types of Endowment Life Insurance Policies?
Endowment life insurance policies come in several types, each with its own features, benefits, and drawbacks. Understanding the differences between these types can help you choose the right policy for your needs.
Types of Endowment Policies | Traditional Endowment Policies | Unit-Linked Endowment Policies | With-Profit Endowment Policies | Full Endowment Policies |
Premiums | Fixed | Flexible | Fixed or flexible | Fixed or flexible |
Investment | Insurance component | Investment component | Insurance + Investment | Insurance + Investment |
Cash Value | Guaranteed | Market-based | Guaranteed | Market-based |
Growth | Predetermined | Based on investment performance | Participated in company profits | Based on investment & company profits |
Risk | Lower | Higher | Moderate | Moderate or High |
Policy Termination | Maturity or Death | Maturity or Death | Maturity or Death | Maturity or Death |
Flexibility | Limited | High | Moderate | High |
What are the advantages of Endowment Policies?
Endowment policies offer several benefits to policyholders, including :
- Tax advantages: Endowment policies offer tax-free growth on the policy's cash value and tax-free payouts to beneficiaries. Under Section 80C, policyholders can claim up to ₹1.5 lakh in tax benefits on premium payments.
- Flexibility: These policies allow you to add extra coverage or borrow against the policy’s cash value when needed.
- Low-risk investment: Endowment plans combine insurance and safe investments to provide low-risk returns of about 8-10%.
- Bonus: Some endowment policies also include bonuses, which are added to the maturity amount when the policyholder declares the plan.
- Investment growth: The savings component can grow significantly over the policy term, helping you achieve long-term financial goals.
- Loan Facility: You can use the policy as collateral to take out loans against it.
What are the disadvantages of Endowment Policies?
Endowment policies also have some drawbacks, including:
- Cost: Endowment policies tend to be more expensive than other life insurance options because they combine insurance coverage with a savings component.
- Limited investment options: These policies typically offer few investment choices as the insurance company manages the investments.
- Risk: Unit-linked endowment policies carry investment risks, with the cash value depending on how well the underlying investments perform.
- Limited liquidity: Endowment policies have restricted liquidity, so accessing the cash value might result in penalties or surrender charges.
Who Should Consider an Endowment Life Insurance Policy?
Endowment policies are not for everyone. Here are a few cases under which they might seem suitable -
CASE 1: If you have specific long-term financial goals, such as saving for a child's education or a down payment on a house.
CASE 2: If you want to combine life insurance coverage with long-term savings.
CASE 3: If you are willing to commit to regular premium payments for a fixed period.
CASE 4: If you are looking for a safe and guaranteed way to save money.
However, an endowment policy may not be the best choice if you want a more affordable life insurance option or want more control over your investments. It’s essential to compare endowment policies with other life insurance policies to determine which one is right for you.
Endowment Plans vs Term Insurance Policies
Term Insurance vs Endowment Plans | ||
Features | Term Insurance Plans | Endowment Plans |
Definition | A vanilla financial tool that extends funds after the death or total and permanent disability of the policyholder. | A term plan with a savings component extends financial security and helps your finances grow over the years. It also includes a death component. |
Flexibility | ❎ | ✔ |
Investment Option | ❎ | ✔ |
Cash Value | ❎ | ✔ |
Premiums | ↓ Pocket-friendly premiums | ↑ Relatively higher premiums than term insurance plans. |
What Should You Choose: Term Insurance vs Endowment Plans?
ASPECTS | Term Insurance | Endowment Plan |
DEFINITION/GOAL | A vanilla protection tool that extends financial help in the form of the sum assured and additional amounts (from riders) after the policyholder's death. | A protection tool and savings channel combined into one, which offers
|
Coverage size | Extensive coverage | Standard coverage (since a portion of the premium goes into the savings component) |
Premium Paid | Affordable | Spiked (as compared to term plans) |
Maturity benefit | None | Yes |
Riders | Yes. The most common ones include - Critical Illness Benefit Rider, Accidental Death and Disability Benefit Ride, Terminal Illness, Waiver of premium, Increasing/Decreasing cover, and Life Stage benefits. | None |
Tax benefits | Yes - Under Section 80C, 80D, 10(10D) | Yes - Under Section 80C and 10(10D) |
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Conclusion
Endowment life insurance policies combine insurance coverage with savings, making them a popular choice for many. They provide investment growth, guaranteed payouts, tax benefits, and flexibility. However, they tend to be more expensive than other life insurance options, offer limited investment choices, and carry some investment risk. It's important to weigh these pros and cons and compare them with other life insurance options to find the best fit for your needs.
