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What are the Benefits of Endowment Policy?

An endowment policy serves as a comprehensive life insurance plan offering a unique combination of both life coverage and savings/investment. These insurance policies provide either a lump sum upon reaching maturity or, in the unfortunate event of the policyholder's passing, whichever transpires first.

Unlike traditional insurance plans, which operate on the basis of paying a premium to receive compensation for incurred losses, endowment plans go beyond merely covering losses. It is aimed at providing a secure and structured approach to long-term financial planning and security.

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Benefits of Endowment Policy

Benefits and Functionality of Endowment Policies

Benefits and Functionality of Endowment Policies
August 09, 2024

Table of Content

 

Benefits of Endowment Policy

Here are some of key benefits of an endowment policy as discussed hereunder:

  • Guaranteed Returns: 

One of the primary attractions of endowment policies is the promise of guaranteed returns. Unlike market-linked investments that fluctuate with economic conditions, endowment policies provide a fixed sum upon maturity. This predictability makes them a favoured choice for individuals seeking financial stability. 

Policyholders can rely on receiving a specific amount upon the policy’s maturity, irrespective of market volatility. This feature is particularly beneficial for those with risk aversion, as it eliminates the uncertainty often associated with investments. While the returns may not be as high as some market-linked instruments, the assurance of receiving a predetermined amount offers peace of mind.

  • Comprehensive Life Cover: 

An endowment policy offers robust life insurance coverage. In the unfortunate event of the policyholder's demise, the nominated beneficiaries receive the sum assured, providing a financial safety net during challenging times. This benefit is particularly valuable for families dependent on the policyholder's income, ensuring their financial stability. Moreover, the policyholder can avail loans against the policy value in case of urgent financial needs, offering liquidity and peace of mind.

Beyond life insurance, endowment policies also function as a disciplined savings instrument. Regular premium payments cultivate a habit of savings, allowing individuals to accumulate a substantial corpus over time. This maturity benefit can be utilised for various life goals such as children's education, marriage, or a down payment for a home.

  • Attractive Maturity Benefits: 

Endowment policies offer compelling maturity benefits that make them a popular choice for long-term financial planning. Upon reaching the policy's maturity date, the policyholder is paid a substantial lump sum amount. This payout can be strategically utilised to fulfil life goals like purchasing a home, funding higher education, or starting a business. Moreover, some endowment plans incorporate bonuses, which can enhance the final maturity amount, providing additional financial benefits.

The guaranteed nature of maturity benefits in endowment policies offers a sense of financial security. Unlike market-linked investments, policyholders can rely on receiving the promised sum at the end of the policy term, irrespective of market fluctuations. This certainty is particularly appealing to individuals seeking stable and predictable returns on their investments.

  • Tax Advantages: 

One of the most compelling reasons to consider an endowment policy is its tax benefits. These policies align with the Indian tax system, offering deductions on premiums paid and tax-free maturity benefits. Under Section 80C* of the Income Tax Act, a portion of the premiums paid towards the endowment policy can be claimed as deductions from your taxable income, subject to the overall limit. This effectively reduces your tax liability for the financial year.

Furthermore, the maturity proceeds received from an endowment policy are generally exempt from income tax under Section 10(10D)* of the Income Tax Act. This means you can enjoy the full amount without any tax deductions, making it a tax-efficient investment option for wealth accumulation.

  • Combined Insurance and Investment: 

An endowment policy offers a unique blend of insurance coverage and investment opportunities. This dual advantage makes it a popular choice for individuals seeking financial security and wealth creation. By allocating a portion of each premium towards investment, policyholders can benefit from potential growth over the policy term. This growth, coupled with the guaranteed maturity benefit, can create a substantial corpus for future financial goals.

  • Easy Liquidity: 

An endowment policy offers a degree of financial flexibility that other investment instruments may not. In times of urgent financial need, policyholders have the option to avail a loan against the policy. This facility can be a lifeline during unexpected expenses or emergencies. The loan amount is generally a percentage of the policy's surrender value. The availability of this option provides a safety net for policyholders, offering peace of mind and access to funds when required.

  • Additional Rider Benefits: 

Endowment policies often offer the flexibility to enhance coverage through additional riders. These riders provide tailored protection beyond the core policy benefits. For instance, critical illness riders can offer a lump sum payout upon diagnosis of specified critical illnesses, aiding in medical expenses. Accidental death and disability benefit riders provide financial support in case of unforeseen accidents. By carefully selecting riders, policyholders can create a comprehensive financial safety net aligned with their specific needs and risk profile.

  • Loan Facility Against Policy: 

One of the significant advantages of endowment plans is the option to avail a loan against its value. This feature provides policyholders with a financial safety net during times of need. By pledging the policy as collateral, individuals can secure loans at competitive interest rates.

The loan amount typically depends on the policy's surrender value, which is the amount payable to the policyholder in case of surrender. This facility offers a convenient source of funds without the need for additional documentation or credit checks, making it a hassle-free process.

  • Low-Risk Investment Option: 

Endowment policies are often lauded as low-risk investment plans. Unlike market-linked investments, which fluctuate with economic conditions, endowment policies offer a degree of stability. The returns are typically guaranteed, providing a predictable financial outcome. This makes them an attractive choice for risk-averse individuals seeking to safeguard their savings while earning reasonable returns. 

How Does Endowment Life Insurance Work?

Endowment life insurance is a unique type of insurance policy that encompasses both life coverage and a savings plan, thus providing a dual advantage of death benefits and maturity benefits. These policies involve a detailed process, covering essential aspects that should be carefully considered.

1. Choosing a Policy:

Selecting an endowment plan involves careful consideration. Factors such as the policy term, sum assured, premium payment mode, and riders should be meticulously evaluated. The policy term should align with your long-term goals, whether it's a child's education, marriage, or retirement.

The sum assured determines the financial protection for your family in case of unforeseen events. The premium payment mode, be it annual, half-yearly, quarterly, or monthly, influences your cash flow. Moreover, riders can enhance coverage, providing protection against critical illnesses or accidental disabilities. It is advisable to compare multiple plans from different insurers to find the most suitable option that meets your specific needs and budget.

2. Premium Payments:

Premiums that you have to pay for endowment policies are generally higher compared to those for regular term plans due to the inclusion of a savings element. Policyholders can choose either monthly, quarterly or yearly premiums, based on the policy terms.

Paying your premiums regularly is vital to keep an active policy and to build up your savings over time. Some endowment policies offer limited premium terms. Here, you need to continue paying premiums for a certain time, but you receive coverage till the policy’s maturity.

3. Accrual of Bonuses:

A significant advantage of endowment plans lies in the accumulation of bonuses. These are additional sums granted by the insurance company, enhancing the policy's maturity value. The insurer usually declares to pay these bonuses on a yearly basis, depending on the policy’s performance and returns generated.

These bonuses may be reversionary, which means they add to the plan’s sum assured and payable upon maturity or the policyholder’s death. Alternatively, the insurer can pay them out as a lump sum. These bonuses increase the overall value of the policy and its maturity benefits and sum assured.

4. Maturity Benefits:

The cornerstone of an endowment policy is the maturity benefit. Upon the policy’s maturity, the insured person receives a lump sum amount. This sum comprises the original sum assured, along with any accumulated bonuses or profits generated by the policy. These bonuses are essentially rewards offered by the insurance company for consistent premium payments.

The maturity benefit serves as a financial cushion, ideal for fulfilling significant life goals. Whether it's funding your child's higher education, planning for retirement, or making a substantial purchase, the lump sum payout provides the necessary financial backing. Moreover, some endowment plans offer flexible payout options, allowing you to choose between a lump sum or regular income, providing tailored solutions to suit individual needs.  

5. Death Benefits:

In the unfortunate event of the policyholder's demise during the policy term, the designated nominee receives the death benefit. This sum is typically equivalent to the sum assured, along with any accumulated bonuses.

The death benefit acts as a financial safety net for dependents, helping them navigate financial challenges during a difficult time. It provides the necessary funds to meet immediate expenses, such as funeral costs, outstanding debts, and ongoing living expenses. Additionally, the death benefit can be used to secure the financial future of beneficiaries, including children's education or marriage.

6. Surrender Benefits:

An endowment policy offers a degree of flexibility through surrender benefits. Policyholders have the option to discontinue the policy before its maturity date. Upon surrendering the policy, the insurer typically returns a portion of the premiums paid, often referred to as the surrender value.

However, it is crucial to note that the surrender value is generally lower than the total premiums paid. This is because a part of the premium contributes to the risk cover, and administrative costs are also deducted. Therefore, surrendering a policy before maturity often results in a financial loss. It is advisable to consider this carefully before making a decision.

While surrender benefits provide an exit option, it is generally recommended to hold onto the policy until maturity to maximise returns. Endowment plans are designed to be long-term investment plans, and surrendering early can negate the potential benefits accrued over time.

Conclusion

An endowment policy provides a comprehensive financial solution by combining life insurance protection with savings potential. It offers a safety net for your family in the event of unforeseen circumstances and allows you to build up a significant sum for future goals. By carefully considering factors such as coverage amount, premium affordability, and policy term, individuals can take advantage of the benefits of endowment policies to attain long-term financial security and peace of mind.

FAQs about Endowment Policy Benefits

What are the advantages of endowment policy?

Endowment policies offer the dual benefit of life insurance and savings. They provide financial security for your family in case of an untimely death and also help you build a lump sum corpus for future goals like buying a house, child's education, or retirement. Additionally, these policies often come with tax benefits, making them an attractive investment option.

Is an endowment plan a good investment?

An endowment plan offers a dual benefit: life insurance coverage and savings. It guarantees a lump sum payout at maturity, providing financial security. While it encourages disciplined savings and offers potential bonuses, the returns might be lower compared to other investment options. You must consider your risk appetite and financial goals before making a decision.

What are the disadvantages of endowment policy?

While endowment policies offer life cover and savings, they also have drawbacks. Returns on endowment policies are often lower compared to other investment options. These policies have a long lock-in period, restricting early withdrawals. Moreover, the premium amount is fixed and cannot be adjusted based on income fluctuations.

What is the maturity benefit of an endowment plan?

The maturity benefit in an endowment plan is the lump sum amount paid to the policyholder upon completion of the policy term. This amount includes the original sum assured and any accumulated bonuses. It serves as a financial cushion for various life goals such as retirement, children's education, or a down payment for a property.

What are the three types of endowments?

There are primarily three types of endowment policies:

  • Guaranteed Endowment Plan: This type of policy offers assured returns at maturity, regardless of market fluctuations. It is ideal for risk-averse individuals seeking stability.

  • Unit Linked Endowment Plan (ULIP): In this plan, a portion of the premium is invested in market-linked funds. It offers higher potential returns but also carries investment risks.   

Non-Participating Endowment Plan: This type does not share profits with policyholders. Premiums are fixed, and returns are predetermined.

 

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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* Tax benefits & exemptions are subject to conditions of the Income Tax Act, 1961 and its provisions. Tax Laws are subject to change from time to time. Customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.

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