There are a host of insurance policies available – each for different needs and requirements of consumers. Endowment plans are a popular form of insurance that are risk-free and sought after by individuals who do not mind lower returns for a risk-free investment. In this article, we’ll discuss in further detail about how an endowment plan is different from a term plan, the key benefits of opting for an endowment plan, types of endowment plans, etc.
An endowment plan
is a combination of insurance and investment. In case of a term insurance policy, there is no maturity benefit – i.e. in the event the person survives the policy tenure, the person does not receive a sum on completion of the tenure. In other words, if the person dies during the policy tenure, his dependent/nominee gets the monetary value or the sum assured. An endowment plan offers users the best of both worlds. Here, the person gets a sum assured on maturity. Also, in the event of the person’s unfortunate demise, the policyholder’s kin receive death benefit.
Broadly, there are two types of endowment policies – with profit and without profit. Within these two classes, there are several variations structured to meet different objectives of policyholders such as whole life protection, savings, pension, child’s education, etc.
The key benefits of an endowment plan are:
i. Goal-based savings: With endowment plans, policyholders are expected to set aside a pre-determined amount as premium at a stipulated time-interval. This calls for a disciplined approach to saving money.
ii. Tax Benefits: The plan offers Tax benefits under section 80 C and 10 (10D) of the Income Tax Act.
iii. Loan: In case of emergency, policyholders can obtain loan against the policy – usually without having to secure the loan against a collateral.
iv. Bonus: Endowment plans declare a bonus every year. The bonus is typically given out as a certain percentage of the sum assured.
While the insurer may announce a bonus at the completion of each year, the bonus declared is not payable immediately. Unlike in the case of stock dividend or a mutual fund dividend, which is payable immediately after it is declared, here the bonus accumulates and is payable only when the policy matures or in the event the policyholder dies. Also, it is important to note that the bonus does not compound or interest is not attracted to the bonus amount each year. The amount continues to accumulate each year for the entire policy term.
There are a variety of insurance plans available in the market today. Choosing an appropriate plan depends on several factors including your current investment/savings objectives, age, income, long term financial objectives, etc. Besides evaluating these aspects, you will have to factor in the following:
i. Premium Rates: The premium payout for endowment plans is far higher than that of term insurance. Therefore, one has to evaluate the premium payable carefully before going for a long term commitment.
ii. Bonus Payment: Check the insurance company’s track record of bonus payments. For instance, if the insurer pays a bonus of Rs.50 for every thousand rupee in sum assured, then the bonus for a Rs.10 Lakh policy works out to Rs.50,000. This translates to a bonus of 5%. If the insurer continues to provide a 5% bonus each year, the policyholder will have Rs.20 Lakhs at the completion of 20 years – i.e. Rs.10 Lakhs as sum assured and Rs.10. Lakhs in accrued bonus.
iii. Claim Settlement Ratio: In the event of the death of the policyholder mid-way during the policy tenure, the nominee will have to file for a claim. Therefore, in order to ensure that in the unfortunate event of demise of the policyholder, the nominee faces minimal chances of claims rejection, it is important to note the claims settlement ratio of the insurer.
iv. Customer Service: Look for reviews, ratings and feedback of the insurer to understand if their customer service is prompt and forthright when needed the most.
v. Financial Standing: Evaluate the financial standing, the reputation and number of years that the insurer has been in business.
Read your insurance document carefully before you commit – avoid policies with complex features that you find difficult to comprehend. Endowment plans might offer lower returns but they also offer the much needed peace of mind knowing that your investment and insurance needs are both addressed with a single plan.