Money might not buy happiness, but it can surely ensure financial security. Endowment plan, a type of life insurance plan is what you need to ensure your financial security and fulfil our non-negotiable life goals. We’ll explain it all, including endowment meaning, its types and the benefits you’ll get with it....Read More
: In Unit Linked Policies, the investment Risk in the investment portfolio is borne by the policyholder.
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What is an Endowment Plan?
An endowment plan is a kind of life insurance product that comes with dual functions. First and foremost, as it is an insurance product, it offers the sum assured to the beneficiaries in the event of the untimely death of the policyholder (if the death occurs during the policy term). Secondly, as an endowment policy meaning also establishes it as a saving instrument, it can help generate a corpus through small regular investments that are paid out if the policyholder survives the policy duration.
Types of Endowment Plans
Now that the endowment meaning is clear, let’s discuss the certain types of endowment plans in India:
1. Unit Linked Endowment Plan
Unit Linked Endowment plan is suitable for individuals who are willing to take more risk by investing in market funds. If market-linked plans and endowment meaning is clear to you, you might have an idea about a unit-linked endowment plan. A unit-linked endowment plan works like a market-linked investment scheme, wherein a part of the premium is used to buy units of investment funds. Consequently, the returns and endowment fund value depend on the NAVs (Net Asset Value) of the endowment fund.
2. Full-Profit Endowment Plan
As endowment meaning is known, this type of full-profit endowment plan mitigates the risk of market returns by providing an assured sum on maturity or on the untimely death of the policyholder. In addition to a sum assured, the policyholder is also entitled to the bonuses that are paid out from time to time and can be redeemed upon maturity or in the event of the untimely death of the policyholder.
As the name suggests, this type of endowment policy doesn’t offer bonuses and profits unlike the previous type of endowment policy. However, it does offer some guaranteed additions to the policyholder that can be redeemed on the maturity or the untimely death of the policyholder.
3. Low-Cost Endowment Plan
As the low-cost endowment meaning suggests, this type of plan is one of the most affordable endowment plans, given that it comes with a low premium. Yearly bonuses are also included in this.
This type of endowment plan also allows withdrawal in emergencies. Furthermore, this can be used to fund loan payments.
Benefits of Investing in an Endowment policy
As the endowment meaning is two-fold, it has many advantages that the policyholder can benefit from. Here are some of the benefits of endowment policy:
1. Financial Security for your FamilyNow that we know endowment meaning, we know that an endowment policy comes with the benefit of an endowment insurance instrument, ensuring that your family stays protected even in your absence. In certain types of endowment plans, not only a guaranteed sum is assured, but additional bonuses as well that can be redeemed upon the tragic demise of the policyholder.
2. Helps Build SavingsAs the meaning of endowment plan suggests, we know that it is also a saving instrument that aids build a corpus against regular investments, coupled with the bonuses and guaranteed additions offered by some endowment plans.
3. Flexibility to Decide Premium FrequencyEven though the premium is decided in an endowment policy, the policyholder has the privilege to decide the premium payment frequency. Premium can be paid on a monthly, semi-annual, or annual basis. This benefit can allow a policyholder to spend according to their convenience and financial capability, Additionally, it can also help budget planning.
4. Loan OptionIn some types of endowment plans, loan option is available against the policy. This is highly beneficial for individuals who wish to secure a loan, but not from a bank at a higher rate of interest.
5. Maturity Benefits
Some types of endowment plans do not only provide sum assured but also offer maturity benefits in form of additional bonuses, and guaranteed additions. These maturity benefits help increase the endowment fund value (endowment fund meaning = returns + accrued bonuses), helping individuals generate more wealth.
Features of an Endowment Plan
An endowment plan is an insurance plan with multiple features. Here are a few of them:
1. Lump-Sum Payout
Some types of endowment insurance plans offer a lump-sum payout. The lump-sum payout can include the sum assured, and guaranteed additions provided by various types of endowment plans.
2. Option to Buy Riders
With an endowment plan, policyholders can buy additional riders to maximize their benefits. Riders offer various benefits to the policyholder in return for a nominal extra premium. Every insurance company provides different type of riders. However, some of the most commonly found riders include critical illness, waiver of premiums, and accidental death riders.
3. Survival Benefit and Death Benefit
The pivotal characteristic of an endowment plan is that it provides both, survival benefit and death benefit. If the policyholder survives the policy term, they can get the maturity amount, and if they do not, the beneficiary gets the sum assured.
4. Suits Both High and Low-Risk Appetite
Whether you are someone who can afford to take more risks or someone who cannot, there are different types of endowment plans catering to every level of risk appetite, high or low. Unit linked endowment plan, for instance, is most suitable for individuals who have a high-risk appetite, while individuals with low-risk appetite can opt for the kind of endowment plan that mitigates market risks by providing a guaranteed sum.
How Does an Endowment Policy Work?
Like other types of life insurance policies, an endowment policy works through regular or limited premium payment. You can pay premiums regularly; a pre-decided sum assured will be paid to the nominee in the instance of the untimely death of the policyholder or the maturity amount is paid in case the policyholder stays alive. In addition to it, some types of endowment plans offer guaranteed additions and bonuses.
The returns or the sum assured differ from policy to policy. For instance, if you choose a low-risk endowment plan, you get a guaranteed sum that depends on the premium. However, in other types of endowment plans, the policyholder gets additional profits and returns based on market conditions.
Riders for Endowment Plans
Riders are additional covers that can be bought on top of a basic insurance policy. The additional cover provides benefits that can help individuals save more by offering extensive coverage. Generally, these are a few riders that can be bought with an endowment plan.
1. Critical Illness Rider
Illnesses don’t come with a warning, all the reason why getting a critical illness cover can be highly beneficial if God forbid there’s a diagnosis. A critical illness rider provides a lump-sum payout to aid with the heavy medical costs of the treatment.
2. Accidental Death Rider
This type of rider provides an extra payout to the beneficiaries in case the policyholder suffers from a fatal accident – in addition to the death benefit the beneficiaries are already entitled to upon the untimely death of the policyholder
3. Disability Rider
Disability caused due to an illness or accident can cause significant losses, both emotional and financial. A disability rider can mitigate the financial loss by offering an extra payout if such a mishappening occurs.
4. Waiver of Premium
Death or critical illness can disrupt the premium payment following financial struggles caused by them. Waiver of premium rider, as the name suggests, waives off the future premium paying requirement if the policyholder is diagnosed from a critical illness, disability.
5. Waiver of Premium
Hospitalization can cause significant financial stress. A hospital cash benefit provides some relief by offering a daily cash allowance in an event of hospitalization.
Note: Although these are the most common riders available, they still differ from insurer to insurer. In other words, not all insurance provides provide all the types of riders mentioned above.
Who Should Buy Endowment Plans?
Any earning individual who wishes to generate a corpus to support themselves and their family should buy an endowment plan. As the meaning of endowment is clear, an endowment plan is an insurance and savings instrument, the ultimate goal of providing financial protection to your family, be it in your presence or absence.
Additionally, those individuals who are looking to save tax can also buy an endowment plan, as premiums paid on an insurance policy are tax-deductible (up to Rs 1,50,000).
Things to Know Before Buying an Endowment Plan
Now that we have discussed endowment meaning, it has been well established that buying an endowment plan is highly recommended, it needs to be purchased carefully. Here are all the things you must know before you buy an endowment plan.
1. Know Your Risk Appetite
It’s imperative to understand endowment meaning and your risk appetite before you buy an endowment policy, as the type of endowment plan you buy should depend on your risk appetite. If you have a high-risk appetite, then a Unit-Linked Market endowment plan is highly suggested.
2. Decide your Premium Payment Frequency
An endowment plan gives you the liberty to choose your premium payment frequency. This means you can pay premiums annually, monthly, quarterly or semi-annually. This can be decided according to your budget, and convenience.
3. Choose Suitable Riders
Policyholders can yield extra benefits by buying riders on top of their basic insurance policy. Ergo, when you are buying an endowment plan, choose your riders wisely.
For instance, a peek into the family medical history can determine if you should buy a critical illness rider, as critical illnesses can also be genetic. Additionally, an accidental death rider is also recommended if you commute through a vehicle on a regular basis.
4. Know the Claim Settlement Ratio of the Insurer
Choosing a reliable insurance company is the most important element on the checklist. You wouldn’t want to pick an insurer with a poor claim settlement ratio as it puts your investment at risk. A high claim settlement ratio points to the increased probability of your claims getting settled by the insurance company.
Endowment Policy Taxation
By now we know the endowment meaning, the types, its features and benefits. That said, one of the many benefits of an endowment policy is that it is a tax saving instrument.
Under Section 80C, insurance premiums paid against life insurance policies are tax-deductible up to the limit of INR 1,50,000. Additionally, the maturity amount or the sum assured is also free of taxes.
What are the Documents Required?
Here is a list of documents required to buy an endowment policy:
- Address Proof
- Income Proof
- Application form
To Make a Maturity Claim
- Endowment Policy Document
- Discharge voucher
To Make a Death Claim
- Claim Form
- Certificate of death
- Endowment Policy document
- Deeds of assignments/ re-assignments if any
- Form of discharge executed and witnessed
Frequently Asked Questions
Yes, insurance companies allow change of beneficiaries in an endowment policy. To do the same, you can contact your insurance company.
As an endowment plan is a type of life insurance, there are certain situations where the insurance company can deny the claim. This includes deaths caused by suicide, self-injury, participation in adventure sports, drugs, riots and civil disturbances.
Yes, one can surrender their endowment policy and receive their surrender value. Surrender value is the amount the policyholder is entitled to if they surrender their policy. In addition, to surrender value, the policyholder is also entitled to the accrued bonuses (if applicable) if they exit the policy before maturity.
The answer to what is an endowment fund is simple. It is a financial asset containing returns, assured sum, and accrued benefits. An endowment fund is paid out either on maturity or as a death benefit.
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