Endowment Plans
Very simply put ENDOWMENT is an act of providing capital for a permanent source of income.
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When you take a TERM Insurance plan, add an offer of certain returns on the premium you will have paid during the tenure and voila! you have an Endowment plan working for you. An endowment plan combines insurance with investment. As an insurance policy, it promises to protect your family financially in the event of your death. As an investment, it offers returns on your savings. The accumulated premiums and bonuses become a large sum by maturity.
The insurance companies invest the premium amounts in various avenues on your behalf and charge a nominal administrative fee for the service. Through regulated investments they make your money work hard and provide for a return on your invested premium money. With a little additional premium amount you can look at adding a life cover with the policy and get a dual benefit.
TYPES of ENDOWMENT PLANS:
- Single Premium Endowment Plan: You pay the premium amount in a lump sum at the start of the policy tenure. This plan has a dual advantage of non-linked savings along with a protection plan. This combination provides financial protection to your family in case of your death during the policy term and has a provision of payment of lump sum amount at the end of the selected policy term in case of your survival. This plan also takes care of your short term liquidity because you can take out a loan on this policy.
- Regular premium Endowment Plan: This policy is good for you if you are looking for a combination of protection and building a savings fund. Herein, you pay the premium in regular either through a monthly, quarterly or annually option. You can be assured of a financial support for your family in an untowardly event of your death before the maturity of your policy. You can also enjoy a good lump sum amount at the time of maturity. Again, this plan offers you liquidity through its loan facility.
- Without-profit Endowment Plan: Under this plan you do not participate in the profits the insurance company makes each year. Along with the sum assured, you could possibly get a loyalty bonus, which is a one-time payout made in appreciation of your loyalty to the insurance company.
- With-profit Endowment Plan: Under this offering, the insurance company shares the profits it makes each year with the policyholder. Thus, the plan offers more returns than the without-profit endowment plan and charges a higher premium for all the other parameters remaining the same. When you know what is the expected amount of profit in the beginning itself, it is called an assured returns insurance plan which in the insurance terminology is called guaranteed additions. When the assurances are variable and uncertain, the added return on your investment is called bonuses. Bonuses are to insurance policies what dividends are to shares. Non-guaranteed!
How do Endowment Plans work?
The premium you pay for an Endowment Plan is divided into 3 parts- Expenses, Mortality and Investment. The Mortality charge is a charge for the Life Coverage or Sum Assured that is provided depending upon various aspects that include the Life Insured’s age, health, occupation, location, etc. The Expenses for all Endowment Plans are standard charges like Administrative Costs, Commissions paid, etc.
Benefits of ENDOWMENT PLANS:
- Long Term Savings: Endowment Plans do not provide the best of returns as compared to other pure investment products like Mutual Funds etc. but they definitely help to create a Long Term Corpus with the savings. In fact it aides as forced savings for many.
- Cover and investment: An Endowment Plan provides a life cover while also investing your money in various securities. As a result, upon death or maturity of the policy, whichever occurs earlier, you get a hefty amount of money in your hand.
- Tax Benefit: Like most other Insurance Plans, Endowment Plans have a 2 fold Tax Benefit. The premium invested in this plan is tax free till Rs. 1.5 lac per annum under section 80C and the Maturity Benefit is tax free under section 10(10)D since the Sum Assured in a Traditional Endowment Plan is always more than 10 times the premium that is being paid. Hence the new IRDA rules do not affect this.
- Security for loan: Your endowment policy can double up as a security for a loan. Since these plans are long term plans and the money assured is on the higher side, loans are easily available against the Endowment Plans.
- As a fund: People invest in Endowment Plans to save up for a particular future event. You can buy Endowment Plans to serve as your retirement benefits and receive the sum assured after retirement. You can also, plan and start saving for a major life event like your child’s marriage or funding his/her college admission.
Optional Benefit: Accidental Death and Disability Benefit Rider is available as an optional rider by payment of additional premium. In case of an accidental death, the Accident Benefit Sum Assured will be payable as lump sum along with the death benefit under the basic plan. In case of accidental permanent disability arising due to accident (within 180 days from the date of accident), an amount equal to the Accident Benefit Sum Assured will be paid in equal monthly installments spread over 10 years and future premiums for Accident Benefit Sum Assured as well as premiums for the portion of Basic Sum Assured which is equal to Accident Benefit Sum Assured under the policy, shall be waived.
Tip : The average overall yield of an endowment plan is somewhere between 4-7%. Though the Endowment Plans have been criticized a lot for being expensive insurance offerings, but on investing correctly, you can get some great benefits from them.