What is Endowment Policy? Meaning, Benefits, Best Plans (2024)

Endowment plans make financial planning extremely easy and convenient because they offer a number of benefits that make your present and future financially safe. The policy offers the dual benefit of life insurance coverage and a saving avenue. You will be paid a lump sum amount after the maturity date. In the unfortunate event of your passing, your family will receive the amount.

Today, there are several different endowment policies to choose from. They have proved to be one of the most preferred investment avenues among investors. 

If you are considering buying an endowment policy, then this article will help you learn the nitty-gritty about it. Here, you’ll get its meaning, benefits, types of policies & best endowment plans in 2024 and more.

What is an Endowment Policy?

An endowment policy is a life insurance plan which enables the policyholder to receive a lump sum at the time of maturity or in the event of the policyholder’s demise. It is an investment scheme that offers a combination of an insurance plan and a savings scheme. The endowment plan returns are fixed during the purchase.

How Does An Endowment Plan Work?

An Endowment plan works in a two-fold method: Through an insurance pathway and an investment pathway. Let’s take a look at how both of these play out together:

Premium & Life Cover: Policyholders pay regular premiums for a set term, receiving life insurance coverage. If the policyholder dies within the term, beneficiaries get a death benefit.

Maturity Benefit: If the policyholder survives the term, they get a maturity benefit. This sum includes the assured amount and any investment returns or bonuses.

Investment Component: Part of the premium is invested by the insurer. Returns vary based on the plan’s nature, and these either add to the maturity benefit or are given as bonuses.

Bonuses:

• Terminal Bonus: A one-time bonus paid at the policy’s end.
• Reversionary Bonus: An annual bonus guaranteed and paid at death or maturity.

Policy Benefits:

• Loan Facility: Some plans let policyholders borrow against the policy.
• Additional Riders: Plans may offer extra benefits like critical illness cover.
• Surrender Value: If terminated early, policyholders might get a surrender value based on paid premium years.

Why You Should Buy an Endowment Plan?

Let’s take a look at some of the crucial reasons why you should buy an endowment plan:

1. Dual Advantage: With an endowment plan, you not only get life insurance but also benefit from a savings component, making it a two-in-one financial tool.
2. Financial Protection: If something happens to the policyholder during the plan’s term, the beneficiaries receive a death benefit, ensuring their financial security.
3. Savings Discipline: The routine of paying regular premiums fosters a habit of systematic savings, assisting in building a financial nest egg over time.
4. Tax Perks: You can often enjoy tax deductions on the premiums you pay and receive tax-free maturity benefits, optimizing your tax savings.
5. Stability & Safety: Endowment plans are generally low-risk, providing a more stable return on investment than many volatile market-linked instruments.

Types of Endowment Policy

Here is a list of the types of endowment policies you can choose from:

• Unit Linked Endowment Plan:  This endowment plan offers the provision of a life cover, along with all the benefits of a savings scheme. The policyholder’s funds are invested in units of their chosen insurance fund. In this plan, the premium paid by the policyholder is divided into compartments as per their choice. Part of your premium goes into a life cover and the remaining is invested in equity funds, debt funds or a mix of both. Although the risk is higher in such policies, the return is significant. This plan is ideally meant for people who have a high-risk appetite.  

• Full/With Profit Endowment Plan: This is one of the most-secure endowment schemes. 

• Low-Cost Endowment Plan: Under this plan, the insurance company is liable to pay the complete sum assured at maturity. In addition to this, the company will also pay annual bonuses, if any. This plan is suitable for people who want to save money meant for future payments. 

• Non-Profit Endowment Plan: This is the standard endowment plan devoid of any added benefits and profits. Under the low-profit plan, the policyholder receives the sum assured at the time of maturity. In case the policyholder dies before the plan matures, the insurance company pays the sum assured to the beneficiary.

• Guaranteed Policy Endowment Plan: This plan is independent of the “life” of the policyholder. The policyholder is guaranteed to the assured sum at the time of maturity, irrespective of any circumstances. 

Best Endowment Plans in India 

With so many endowment plans available today, make sure you choose the one that fits you best. To make your choice easier, here is a list of the best endowment plans in India.

• Aviva Dhan Nirman Endowment Policy: The entry age, for the life assured, in this policy ranges from 4 to 50 years. The maximum maturity age is 75 years. The policy term for Aviva Dhan Nirman Endowment Policy is 18 to 30 years. The policyholder can pay a premium on a yearly, half-yearly, quarterly, and monthly basis. The minimum sum assured is INR 2 Lacs, while the maximum sum assured is INR 1 Cr.

• AEGON Life Premier Endowment Insurance Plan: The entry age, for the life assured,  in this policy ranges from 18 to 55 years. You can opt for a loan against your policy of a minimum INR 5,000 from the 4^th year of the policy term. The maximum limit for the loan amount should not exceed 60% of the total surrender value. Policyholders can pay premium on a single, yearly, half-yearly, and monthly basis. 

• BSLI Vision Endowment Plus Plan: The entry age for this policy ranges from 30 days to 60 years. The policy term for the BSLI Vision Endowment Plan is 20 years. The premium paying modes consist of yearly, half-yearly, quarterly, and monthly. The minimum sum assured for this plan is INR 1,00,000, while there is no specified limit for the maximum sum assured.

• Bajaj Allianz Save Assure: The entry age for this policy ranges from 1 to 60 years. The minimum and maximum maturity age is 18 years and 75 years, respectively. The policy term for this policy is 15 and 17 years, based on the choice of term option you choose. The policyholders do not have to pay a premium for the last five years of policy term. The premium paying modes consist of yearly, half-yearly, quarterly, and monthly. The minimum sum assured is INR 1,00,000, while there is no limit for the maximum sum. 

• Bharti AXA Life Elite Advantage Plan: The minimum entry ages for a 10-year and 12-year policy term are 8 years and 6 years, respectively. The maximum entry age for this plan is 65 years. The minimum maturity age for a 10-year policy is 75 years; for a 12-year policy, the maturity limit is extended to 77 years. The premium paying modes consist of yearly, half-yearly, quarterly, and monthly. The minimum sum assured depends on the premium amount, and there is no limit to the maximum sum assured.  

Benefits of Endowment Policy

Before you choose an endowment policy for yourself, make sure that you are aware of its benefits. Let us look at some of them below:

• Endowment plans offer the facility of life insurance during the entire term of the policy.
• At the end of the policy term, the policyholder receives a fixed amount as a sum assured.
• The beneficiaries are entitled to collect a sum assured if the policyholder dies before the policy matures.
• Policy maturity also provides added benefits to the policyholder in the form of bonuses, acting as additional income.
• The received sum assured can be used to fulfill financial obligations and debts incurred by the policyholder. 
• Endowment income can also be planned in a way that caters to the future financial needs of the policyholder. These may include the marriage of kids, education, and retirement expenses.
• Long-term financial goals can be targeted with these plans.
• An endowment policy in India protects the policyholders and their families from all types of financial hardships.
• The coverage offered by these plans is almost risk-free. This means that there is almost a 100% guarantee of the sum assured to be received by the policyholder or the beneficiary.
• In addition to death and maturity benefits, these plans have several tax benefits as well.

Features of Endowment Policy

• Death along with survival benefits: Under an endowment policy, the primary benefits include death and survival benefits. Suppose the policyholder meets with an unforeseen incident and succumbs to it, the insurer will be liable to pay a lump sum amount in the form of a death benefit to the nominee as per the policy terms and conditions. If the policyholder safely completes the policy term, they will receive the maturity benefit or survival benefit. 
• Premium payment frequency: The options to pay your premium are endless under these plans. It depends on the policyholder’s income and the type of policy as to which payment mode is chosen. Also, the policy term and sum assured affect the decision regarding payment frequency and mode.
• Higher returns than other policies: This plan is essentially a savings plan, making it a higher return investment avenue than others. 
• Flexibility in cover: The base plan of the policy can be changed as per the policyholder’s desire. In this case, provisions can be made for critical illness, permanent disability, and accidental death. This can be added to the base plan and enhance the life cover. 
• Tax benefits: Endowment plans have several tax benefits as per the Income Tax Act, 1961. These include exemptions under Sections 80C and 10 (10D).
• Low-risk plan: In comparison to other policies, an endowment plan is considered low-risk. 

Who Should Buy Endowment Policy?

Policyholders interested in low-risk policies should buy an endowment policy, meaning people who want to play safe must opt for this investment option. It is also an ideal plan for people seeking dual benefits, i.e., insurance policy and savings. 

Eligibility To Buy an Endowment Plan

• An essential endowment policy typically requires a starting age of 18 years for enrolment. However, certain policies might be available right from an individual’s birth.
• The upper age limit to buy an endowment plan is set at 60 years, making it a viable option for retirement preparations.
• The policy reaches maturity at a minimum age of 18. So, if one’s parents invested in such a plan during their childhood, it could assist in funding their university or advanced studies.

Documents Required to Apply for an Endowment Policy

Before buying an endowment policy, ensure your documents are in place. Here is a list of documents that you would require:

• Passport-size photographs
• Identity proofs
• Age proofs
• Address proofs
• Duly filled application form

Things to Consider Before Investing in Endowment Plan

If you’re considering investing in an Endowment plan, here’s the following things to remember:

Purpose & Term: Pinpoint why you’re considering an endowment plan, be it retirement or savings. Also, evaluate the policy’s duration to align with long-term objectives.

Bonuses & Returns: Investigate expected returns and potential bonuses. Compare them to other investment opportunities to ensure competitive gains.

Charges & Fees: Understand any hidden costs, like administration or surrender charges, that might affect the policy’s overall value.

Flexibility & Adaptability: Assess if the policy lets you modify the sum assured, adjust premium payment schedules, or provides options for partial withdrawals.

Loan Opportunities: Some plans offer loans against the policy, beneficial during financial emergencies. Delve into the associated terms.

Exclusions Of Endowment Policy

Endowment policies offer financial safeguards but come with specific exclusions that can impact claim settlements. Understanding these is pivotal:

1. High-Risk Activities: Engaging in perilous activities, like extreme sports or races, can void a claim if they result in fatal outcomes, as they’re perceived as deliberately risky.
2. Misrepresentation: Providing false details during the policy purchase can result in its termination. Claims under such terminated policies will be null and void.
3. Pre-existing Illnesses: Deaths due to known pre-existing conditions might not be covered as they can unfairly tip the scales of a potential claim.
4. Riots & Unlawful Activities: Deaths resulting from involvement in riots or illegal activities aren’t covered to discourage incentivizing such behaviours.
5. Substance Misuse: Deaths caused by drug or alcohol misuse are excluded, barring cases where substances are consumed under legitimate medical advice.
6. Suicide: Typically, deaths due to suicide aren’t covered for a stipulated period post the policy’s initiation, although some policies might return a portion of the premiums.

Riders for Endowment Policy

Here is a list of the riders:

• Critical Illness: If the policyholder is diagnosed with a critical illness, they will receive a lump sum. Critical illnesses include cancer, heart attack, paralysis, kidney failure, etc. 
• Disability: If the policyholder suffers from a partial or a permanent disability.
• Waiver of premium: The policyholder would not be liable to pay the premiums of the endowment policy in case they suffer from a critical illness or are permanently disabled.
• Hospital cash benefit: The policyholder can avail of daily allowance as well as post-hospitalization benefits. 
• Accidental death: In case of an accident that leads to the demise of the policyholder, the beneficiary would be able to avail of this benefit.

How to Claim the Endowment Plan after the Death of a Policyholder?

Here are the typical steps needed to be undertaken after the death of a policyholder:

1. Notify the insurer promptly. The beneficiary should reach out to the insurance firm quickly after the policyholder’s passing. This can be accomplished through a direct call to their helpline, by visiting their local branch, or by forwarding an email.
2. Provide necessary documentation. To kickstart the claims procedure, the beneficiary will need to present specific papers to the insurance company. These might comprise:
   • The official death certificate
   • A duplicate of the insurance policy
   • Identity verification of the nominee
   • A recent bank statement of the nominee
3. Complete the claims document. The beneficiary must accurately complete the claim request form and hand it to the insurance company. This document will require details regarding the deceased, the nominee, and the events leading to the policyholder’s death.
4. Furnish any supplementary details if needed. Sometimes, the insurer might ask for more details or evidence to corroborate the claim. It’s crucial for the beneficiary to collaborate with the insurer and submit the necessary data without delay.

Are Endowment Plans Taxable?

Depending on the Endowment plans chosen, the benefit sum can be tax-free. However, typically, an endowment plan comes with tax benefits because the payable premiums, including the main plan benefits (sum assured and the maturity proceeds), are eligible for tax exemption under Sections 80C and 10D of the Income Tax Act, 1961.

With tax exemptions only available for individual policyholders and not corporate policyholders, the maturity proceeds from endowment policies are tax-free in the hands of the policyholder under Section 10(10D) of the Income Tax Act, 1961, provided the premium paid does not exceed 10% of the sum assured. For policies issued before April 1, 2012, this limit is 20%.

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Concluding Thoughts

An endowment policy is one of the best plans for people who are looking for low-risk investment avenues with stable and high returns. They offer benefits like riders, additional bonuses, higher returns, maturity and tax benefits. Compare the policies from different insurers before investing in one.

Frequently Asked Questions (FAQs)