What is an Endowment Plan? A Beginner's Guide

What is an Endowment Plan in Life Insurance?

An endowment plan is a type of life insurance that offers both financial protection and a savings component. It provides a lump sum payout either at the end of the policy term or in the event of the policyholder's death. In simple terms, it acts as a savings tool with the added advantage of life insurance coverage for your family. If you are looking for life cover along with a savings component, this plan might be suitable for you. In this article, you will understand what is endowment plan, how it works, its key benefits, types and more.

What is an Endowment Policy?

Let’s first look at the endowment plan meaning. An endowment plan is a type of life insurance that offers life coverage as well as a savings component. It means that the policy will provide financial protection to the policyholder's family in the event of their unfortunate death. Over the course of the policy term, it will also help accumulate savings for the future.

Premiums for endowment plans must be paid periodically during the policy term. The beneficiaries of an endowment insurance policy will receive a death benefit if the policyholder passes away during the active period of the policy. After the policyholder lives through the policy term and the policy remains active, a maturity benefit is paid out as a lump sum.

How Does an Endowment Policy Work?

Now that you understand the definition of endowment policy, let’s explore how it works. An endowment plan offers both a death benefit and a maturity benefit, provided you pay all your premiums on time.

1. In case of death during the policy term: Your family will receive the death benefit, which is the sum assured agreed upon at the start of the policy. Along with this amount, they may also get certain yearly additions or other bonuses², depending on the terms of the policy.

2. If you survive the policy term: You will receive a maturity benefit, which is the assured amount payable at the end of the policy term. Additional benefits, such as assured yearly additions and loyalty additions, may also be applicable based on the policy features.
    

Here is an example to understand the working of an endowment policy:

Assume an individual takes an endowment plan for 20 years with a sum assured of Rs.10 lakh. If the policyholder passes away during the 20-year term, the family receives Rs.10 lakh along with any bonuses or additional benefits offered by the policy.

If the policyholder survives the full term, a maturity amount of Rs. 10 lakh is paid out, along with any applicable bonuses. Thus, this plan provides financial protection for the family in case of death and also helps in building savings over time.

Types of Endowment Policy

It is important to understand the different types of endowment plans before purchasing one. You can choose from different types of endowment plans based on your financial needs:

What are the Key Factors of an Endowment Policy?

The following are the key factors affecting an endowment plan:

1. Age: Due to their perceived low risk, young people typically pay lower insurance premiums than older people.

2. Gender: Insurance premiums for women are generally lower than those for men.

3. Medical Records: In the calculation of the life insurance premiums, past and present illnesses are considered to estimate potential future illnesses that may affect coverage in the future.

4. Family History: Families with serious health issues, such as heart disease or cancer, can affect premiums, as it suggests a greater likelihood of similar health issues for the policyholder

5. High-risk Activity: A high-risk activity, like smoking, alcohol consumption, and high-risk habits, can increase insurance premiums.

6. Policy Terms: A higher coverage amount and longer policy term usually result in higher premiums as the insurer's liability increases.

7. Premium Payment Frequency: Whether you choose monthly, quarterly, or annual payments can affect the total cost and cash flow flexibility.

8. Bonus Structure: Participating endowment plans may offer reversionary and terminal bonuses, which depend on the insurer’s performance and surplus distribution.

9. Riders and Add-ons: Optional benefits like critical illness or accidental death riders can enhance coverage but also raise the premium.

10. Surrender and Loan Provisions: Early surrender may lead to lower returns, while loan facilities can provide liquidity but reduce the final payout.
     

Benefits of an Endowment Plan

Endowment plans are good insurance policies if you wish to enjoy the dual benefits of life cover and long-term guaranteed¹ returns in a single policy.

1. Death benefit + survival benefit: Under endowment insurance, if the insured meets an untimely demise, their beneficiary is entitled to the sum assured. However, if the policyholder outlives the policy term, then they receive the accumulated savings corpus (plus bonuses, if any) as a maturity benefit.

2. Multiple Premium Payment Frequencies: The policyholder can choose the frequency of the premium payment as per the policy they have opted for. The payments can be made on a monthly, quarterly, half-yearly, or annual basis.

3. Flexible Cover: The coverage of an endowment plan can be extended or enhanced with the help of riders^#, such as total permanent disability, accidental death, critical illness, etc. These riders are included in the base plan if the policyholder feels the coverage should be enhanced.

4. Tax^* Savings: A policyholder can avail of the tax benefits for their endowment plan as per the applicable tax laws. The premium payments of the policy are eligible for tax benefits under Section 80C, while the maturity amount and death payout are eligible for tax benefits under Section 10(10D) of the Income Tax Act, 1961.

Who Should Buy an Endowment Policy

An endowment plan is well-suited for anyone who has long-term goals and wants to save for the future while also having life insurance. These plans can be a suitable option for those looking to save up for their children's college education, buy a dream home, or save for retirement.

However, before choosing a plan, you must determine your financial objectives and how much risk you are willing to take. If you are primarily concerned with returns that are secure and risk-free, a traditional endowment plan may meet your needs. You may want to consider a unit-linked life insurance plan if you can afford to take on more risks for better returns.
 

What to check before buying an endowment policy?

Here are a few simple parameters that can help a first-time policy buyer understand how to buy a new endowment plan:

• The policyholder's goals: It is necessary to consider your requirements and financial objectives, especially long-term goals, before purchasing an endowment plan. Since these plans provide significant returns, they are well-suited if you seek to meet financial goals such as retirement planning, your child's higher education or their marriage, the purchase of a new car, and so on in the later years.

• Features of the Endowment Plan: There are different types of endowment policies which vary in terms of the coverage they offer, the savings or investment option, the premium payment modes, and the options in riders^#. Before buying one, always examine and compare different plans and choose one that aligns with your needs. For example, you can opt for a regular premium plan only if you have a steady and regular flow of income. A single premium plan can be better for someone whose income is not fixed.

• The need for an endowment plan: Policyholders can choose endowment plans for the assured returns they offer on the savings over the long term. These savings can help one meet some major expenses and financial emergencies in future. However, many others who seek life insurance cover along with savings are also in favour of endowment plans. There are also those who avail of such plans because of the tax* benefits offered. However, it is not wise to purchase life insurance plans solely for tax* benefits
   

Endowment Plan vs Money Back Policy

Money-back plans and endowment plans both offer death and maturity benefits. However, these plans differ in the following ways.

Endowment Plan vs Term Insurance Plan

Here is how an endowment plan differs from a term plan:

Endowment Plan vs ULIP Plan

The following is the difference between ULIP and an endowment plan:

Conclusion

Endowment plans enable building a fund corpus, offering savings alongside a life cover. You can fund children's education, buy a home, or do retirement planning. A suitable plan, considering one’s age, medical history, etc can offer the desired coverage along with death and survival benefits. Tata AIA Life Insurance offers several Savings Solutions wtih dual benefits of life cover and guaranteed¹ savings. You can explore Tata AIA Life Insurance Endowment Plans for guaranteed¹ returns, various riders^#, flexible premium payment modes and frequencies, loan against policy and tax benefits as per prevailing norms.

Get in touch with us today for more details.