What Is an Endowment Plan? Meaning and it Types (2024)

July 25, 2024

A life insurance policyis the best avenue to secure the financial future of your loved ones. A combination of life coverage and investment offers the best financial safety net for your family, something you can get from anEndowment policy.It also helps build a corpus to fulfil your financial goals, like creating an asset, meeting the education expenses of your children, and more.

However, before you opt for an endowment plan,it is imperative to know what is endowment policy.

Anendowment plan meaning is life insurance plan that offers both death as well as maturity benefits.The beneficiaries receive the sum assured by way of the death benefit if the policyholder expires during the policy term. On the other hand, if the policyholder survives the term, they will get a lump sum amount by way of maturity benefit.

An endowment plan is a type of life insurance policy that provides life cover as well as a maturity benefit. The life cover component provides a lump sum payout to your loved ones in the case of your unfortunate demise, while the maturity benefit component provides a fixed payout given at the time of maturity. The returns help you achieve your investment goals such as buying a car, paying for a down payment for a house or child’s education.

How Does an Endowment Policy Work?

After understanding what is endowment plan is, you should also be aware of how it works before you contemplate investing in one. An endowment planprovides both life coverage and also helps in wealth creation. It provides financial security for your family by way of death benefitand helps your savings grow by way of returns on the premiums paid.

Flexibility in premium payment modesis the advantage of an endowment policy. You can pay the premiums either monthly, quarterly, half-yearly, or yearly. Single premium payment is also enabled depending on the endowment planyou choose.

You get a predetermined lump sum amount on the maturity of the endowment policy. The maturity proceeds are not affected by market fluctuations or any other changes. You can determine the sum assured depending on the funds required for your financial goals and customise the endowment planaccordingly.

In case of the unfortunate death of the policyholder during the policy term, the beneficiaries or nominees will receive the life cover amount as per the plan, along with any other additional benefits specified in the plan.

The sum assured depends on the type of endowment policypurchased. For instance, guaranteed returns depending on the premium are provided in a low-risk endowment plan,whereas in unit-linked plans, the returns depend on the market conditions.

After knowing the endowment plan meaningand how they work, you can make an informed decision.

Information about the customisable plansavailable under endowment policy to suit individual financial goals is important besides knowing the endowment policy meaning:

• Unit Linked Endowment Plan

ThisULIP planis a combination of life cover and wealth creation. This endowment planis suitable for individuals who aspire for both financial security for the family as well as returns on investment. A part of the premium paid by the policyholder is invested in the market, and the rest of it is utilised to offer life coverage. An additional advantage is the policyholder is given the choice of fund type. The choice depends on the policyholder's appetite for risk.

• Endowment with full profits

This plan provides for predetermined assured returns.This plan mitigates the risk of market fluctuations by paying out an assured amount on the maturity of the policy or the untimely death of the policyholder. The policyholder is entitled to additional bonuses declared by the company from time to time which will be paid out along with the survival benefitor on the untimely death of the policyholder.

• Low-Cost Endowment

The premiums fixed for this plan are low and can be an ideal long-term savingsplan for individuals who intend to create a corpus for financial goals that are way ahead, like children’s higher education, children’s marriage, post-retirement fund, etc. The funds accumulated will be paid at the end of the policy term. The corpus created can also be utilised to pay off loans as well. Among the differenttypes of life insuranceplans, low-cost endowment plans are the most popular as they enable the creation of a corpus with nominal investment.

• Non-profit Endowment

If you want predictable and predetermined returns, a non-profit endowment policy is the ideal plan for you. A guaranteed sum will be given upon the maturity of the policy or the death of the policyholder. No bonuses or profits beyond the guaranteed amount will be given. The sum assured at the time of purchasing the policy will be the final payout.

• Guaranteed Policy

A guaranteed policy ensures that the policyholder gets a guaranteed amount upon the maturity of the policy or in the event of the demise of the policyholder during the policy term. The payout is guaranteed irrespective of the returns on investment made by the insurance company with the premiums paid by the policyholder.

What are the benefits of endowment policy?

An informed decision while purchasing a policy can be made only on understanding what is endowment policyis and the associated benefits. The several benefits of an endowment policyare given below:

1. Ensure financial security for your family

You now know the endowment plan meaningand that it offers dual benefits of life cover as well as savings. If anything unforeseen happens during the policy term, the beneficiaries or the nominee will get a lump sum amount providing financial security for your family. Some endowment plans also provide additional benefits by way of bonuses, which can be redeemed along with the death benefit.

2. Helps Build Savings

As suggested by the definition of what is endowment plan, investing in an endowment policy is asavings planwith systematic investment by way of regular premium payments. The final payout is coupled with bonuses declared by the company from time to time, along with other guaranteed benefits.

3. Flexibility to Choose Premium Payment Frequency

The endowment plan offers flexible premium payment options depending on the convenience of the policyholder. It can be paid monthly, quarterly, half-yearly, or yearly. The flexibility allows the policyholder to budget and plan the savings.

Loan Option

It is important to know if emergency funds are available when in need during the policy term in addition to understanding the endowment policy meaning. The policyholder can avail loan against some endowment policies when in need of urgent funds. The funds can be for any purpose.

Maturity Benefits

Additional benefits in the form of guaranteed additions and bonuses announced by the insurer from time to time are offered along with the sum assured in some endowment plans. This increases the fund value and helps in substantial wealth creation for the systematic investments made in theinvestment plans.

Tax Advantages

In addition to providing financial stability and life cover, endowment plans also help reduce the tax burden. The premiums paid towards anendowment policy are eligible for tax deductiondeductions under 80Cof the Income Tax Act 1961.

For a worthwhile investment in an endowment policy,it is essential to know the various features. Here are some of the features of an endowment plan:

• Insurance Coverage

This feature provides a financial safety net to the family by way of a lump sum payout in the event of the untimely demise of the policyholder.

• Savings Component

If you have understood what is endowment plan, you will know that an endowment policynot only serves as a financial safety net for your family but also helps in building a corpus for your future needs. The lump sum amount received, along with guaranteed additions and bonuses as a survival benefit, is the savings component that will help take care of your deferred financial goals.

• Maturity Benefit

Along with the guaranteed sum assured decided at the time of purchasing the policy, additional guaranteed benefits along with bonuses declared by the company from time to time can be redeemed at the time of final payout made on surviving the policy term.

• Fixed Premiums

The premium is decided depending on the sum assured and the policy term. This helps you to choose the sum assured and the policy term to suit your ability to pay premiums regularly. This way, you will never miss out on a premium and can ensure that the policy is in force at all times.

• Guaranteed Returns

Guaranteed returns provide certainty to the policyholder's investment. The lump sum amounts payable on maturity or the death of the policyholder is predetermined at the time of purchasing the policy, which makes the returns on the investment predictable.

• Bonus Declarations

In addition to the guaranteed returns, some endowment plans also provide additional benefits in the form of bonuses declared by the company from time to time. This can be redeemed along with the final payout or the death benefit.

• Flexibility

Some endowment plans provide flexible cover,i.e., the life cover can be increased or decreased during the policy term depending on the ability to pay the premiums.

• Tax Benefits

The premiums paid for an endowment policy during a financial year are eligible for tax deduction under Section 80C.

What should you look for before purchasing an endowment policy?

If you are buying an endowment plan for the first time here are some factors to consider:

• Goals of the policyholder

Have a clear understanding of your financial goals and needs. Endowment plans cater to long-term financial goals and since the returns are significant and risk free, these plans work best for retirement goals, kids’ education and marriages, etc. An endowment plan is not a suitable option to meet immediate or short term goals.

• Endowment plan features

Always go through the features of all plans you are considering to understand the terms with clarity. Assess coverage, duration, premium to be paid, maturity amount and returns, availability of riders and more. You must compare different plans and opt for the one that meets your needs the best.

• Importance of an endowment plan

It is good to remember that an endowment plan is chosen for its assured returns over long-term savings. It also offers life coverage and a savings component that is a much better investment that basic term plans. For some investors an endowment plan may seem lucrative due to their tax benefits, though tax benefits are available through many other policies offering insurance benefits. It is therefore, important to identify the reason why you want to invest in an endowment plan and whether it will truly benefit you or not.

You can take advisefrom a financial advisor or consultant to understand more about endowment plans and their suitability to your financial goals and needs. It is best to make well informed financial decisions for best returns.

Here are some reasons to purchase an endowment policy:

• An endowment policy is a perfect balance between life risk coverage and savings component.
• Through an endowment policy one is able to save money in a systematic manner for future needs.
• Policyholders receive a maturity amount upon surviving the policy term.
• Helps secure the financial future of dependents and family in case of the policyholder’s death.
• Offers risk-free and fixed returns on a limited sum assured. Hence it is a suitable investment for risk-averse investors.
• Investors can avail tax benefits on the premiums paid up to a specified limit, as per Section 80C of the Income Tax Act.

What Are the Documents Required for an Endowment policy?

Given below is the list of documents required to buy an endowment policy. Also shared are documents required to make a maturity claim and a death claim.

Documents Required for Application:

• Application form
• Photograph of the applicant
• Address proof
• Proof of income

Documents Required for Maturity Claim:

• Discharge Voucher
• Endowment Policy Document

Documents Required for Death Claim:

• Death certificate
• Claim form
• Endowment Policy Document
• Assignment/ Re-assignment deeds if any
• Discharge form — Executed and witnessed

Here are some of the most common and prominent differences between an endowment and amoney back policy:

What Happens When an Endowment Policy Mature?

An endowment policyoffers a dual benefit. Upon maturity (policy term end), you receive a lump sum payout (sum assured + bonuses) if you survive. If you pass away during the term, your beneficiaries get a death benefit. This makes it a suitable option for long-term savings goals and financial security for your loved ones.

Returns from endowment plans are exempt from taxes, subject to some limitations. Policyholders, nominees, and potential buyers should be aware of two kinds of tax benefits for endowment plans:

• Premium Deduction: Policyholders are eligible to receive a deduction on the premiums paid according to Section 80C of the Income Tax Act 1961¹. The deduction is capped at a maximum of Rs 1,50,000 per year.
• Benefits Exemption: Tax exemption can be claimed on the benefits received from the endowment plan under Section 10(10D) of the Income Tax Act 1961¹. This exemption encompasses both the maturity benefit and the death benefit. However, certain criteria must be met to qualify for this exemption.

FAQs on Endowment Policy

1.How is endowment policy calculated?

Endowment policypremiums are calculated based on factors such as the policyholder's age, desired coverage, and length of the policy. An insurance company uses these variables to determine the premium amount and potential maturity benefits.

2.Are endowment plans good or bad?

Endowment planscan be considered good for individuals seeking both protection and savings. However, they may not be ideal for those who prioritise immediate cashflow or require higher returns on investment.

3.What are the disadvantages of endowment policy?

Some disadvantages of endowment policyinclude lower returns compared to other investment options, limited flexibility in withdrawing funds before maturity, and the possibility of inflation reducing the real value of the policy's returns. It is important to carefully consider personal financial goals and risk appetite before opting for an endowment policy.