Nowadays, it has become necessary to regularly set aside a portion of your income to fulfil your life goals. Certain financial products aid you in this endeavour by allowing you to save money so you can accumulate wealth over time methodically. One such product to build up savings is an endowment plan. With an endowment plan, you may save and grow your wealth while also getting a life insurance policy for your family’s financial security, giving you the best of both worlds.
What are Endowment Plans?
An endowment plan can be defined as a type of life insurance policy that provides both insurance and savings; it promises a death benefit as well as a maturity benefit. The policyholder receives a payout when the policy matures, but if they die during the policy term, the nominee(s) receives the sum assured. Endowment plans can be unit-linked or non-unit-linked.
Endowment policies are broadly classified into three types: unit-linked endowment plans, with profit endowment plans or participating plans, and without profit or non-participating plans.
1. Endowment Plans That Are Unit-Linked
When you choose unit-linked endowment plans, the premium you pay is invested in various funds of your choice (after deducting all applicable charges), earning you market-linked returns.
2. Profit Endowment or Participating Plans
A with-profit endowment plan allows for bonus declarations from the insurance provider. The sum assured is paid out by the insurer in the event of death or maturity. The additional component is a bonus. The bonus is a portion of the insurer’s profit.
3. Non-Profit Endowment Plans or Non-Participating Plans
These plans provide assured benefits in the event of death and maturity. There is no market-linked investment component involved in these plans.
What are the Main Features and Benefits of Endowment Plans?
1. Dual benefits
An endowment plan ensures a family’s financial security in the event of an unfortunate demise of the policyholder. Furthermore, in addition to insurance coverage, it also includes a savings component that aids in creating wealth for the future. Endowment policies, in essence, provide both death and maturity benefits.
2. Higher Profits
In an endowment plan, there is a return earned on the premium due to –
- A guaranteed benefit in the case of a non-participating plan
- the return from the funds in the case of a ULIP
- the bonus in the case of participating plans
Endowment plans may include flexibility, such as the ability to pay monthly, quarterly, half-yearly, or annual premiums. In addition, certain policies may include riders for accidental death, accidental total and partial disability, and critical illness, among other things.
4. Tax advantages
Endowment schemes also offer tax advantages. The premiums paid for the policy (up to ₹1.5 lacs) are deductible under Section 80C of the Income Tax Act of 1961. Furthermore, the payout from the policy is tax-free under Section 10 (10D) of the Act.
5. Long-term financial planning
Endowment policies are long-term investments. The plan allows you to save and systematically create wealth over time. It instills a saving habit, and the savings build up over time.
Type of bonuses in an Endowment Plan?
Not every life insurance policy qualifies for the bonus sum. Only participating (with-profit) life insurance policies qualify for the bonus payout. The participating policies partake in the insurance company’s investment gains, which are distributed to the policyholders through bonus payments. The bonus amount is not fixed in advance and could change based on how much profit the insurance provider makes from investments.
4 Things you should Consider while Choosing an Endowment Plan
1. Start planning early
Investing early provides a long investment horizon. This allows you to amass a sizable corpus over time. Because of the power of compounding, it encourages disciplined savings and offers substantial returns. Investing in an endowment plan in your 20s also provides the benefit of early life insurance coverage.
2. Be familiar with the many types of endowment schemes
There are numerous endowment plans on the market. Understanding your needs and risk tolerance is crucial before purchasing a plan. Only then should you choose a policy. In addition, one should understand the kind of plan they are opting for.
3. Select a plan with riders
If the plan offers the option, one may decide to add riders to an endowment policy to enhance the insurance coverage. For example, you can select a critical illness rider or an accidental death rider. Select a policy that offers a wide range of riders so you may tailor it to your needs.
4. Examine your possibilities for flexibility
There are several flexible alternatives available. For example, you can choose a regular pay endowment plan if you have a fixed salary. For those with unpredictable income, there are flexible alternatives and single-pay plans. Comparing the degree of flexibility provided by various insurance providers before purchasing a policy is essential.
Every investment portfolio should include endowment policies. They provide life insurance coverage while allowing you to accrue money paid out at maturity. If the insured dies during the policy’s term, the nominee receives the sum assured. If, on the other hand, the insured outlives the policy period, they receive a lump-sum payment at maturity. You can use the maturity benefits to achieve life goals such as the marriage of one’s children or retirement.