Which policy is a life insurance contract designed to pay a lump sum after a specified term or on death?

Endowment Policy

Endowment plan is a life insurance policy which provides you with a combination of both i.e.: an insurance cover, as well as an savings plan. It helps you in saving regularly over a specific period of time, so that you are able to get a lump sum amount on policy maturity, if the policyholder survives the policy term.

The policyholder gets his/her sum assured on a fixed date in future as per the policy terms and conditions. However, in case of sudden death of the policyholder, the insurance company will pay the sum assured (plus the bonus, if any) to the nominee of the policy. Besides, it is also useful to secure yourself or your family post-retirement or to meet various financial needs such as funding for children's education and/or marriage or buying a house.

What are the Types of Endowment Plans?

There are three types of Endowment plans that you can choose from

• Unit Linked Endowment Plan Under Unit Linked policies, the insurance premiums are bifurcated into multiple units held under a specific investment fund which can be chosen by the policyholders.

• Full /With Profit Endowment Under this plan, the basic amount i.e. sum assured will be provided to the policy holder. This amount is guaranteed right from the start of the policy. However, the final payout provided is comparatively higher depending on the bonuses announced from time to time by the company. The bonuses once declared form a part of the policy are paid out in the event of death of the policyholder or maturity of the policy.

• Low-Cost Endowment This type of endowment plan was designed with an intention of allowing the policyholder to accumulate the funds which have to be paid after a specified time period, usually mortgage.

• Non-profit Endowment These are endowment plans which do not participate in the profits generated by the company (bonuses). However, in order to make them competitive against other products, companies offer guaranteed additions in these plans which help in generating returns for the policy holder.

Features of Endowment plan

• Death along with Survival benefits: In case of demise of the insured, the beneficiary/nominee of the policy gets the sum assured along with bonuses. Also, the insured is allowed to get the sum assured if he/she outlives the policy.

• Higher returns: An endowment policy is helpful in building a corpus for future and providing financial protection to your family. The payout for survival benefit and death benefit of an endowment plan is higher than that of a pure life insurance policy i.e. Term Plans.

• Premium payment frequency: The policyholder can make payment of the premium based on the policy chosen by him/her. Payment can be done on monthly, quarterly, half-yearly, and on yearly basis.

• Flexibility in Cover: Riders like critical illness, total permanent disability, and accidental death can be added to the base plan and enhance the life cover. In addition to this, there are a few plans that offer waiver in the premium payment on total permanent disability or critical illness.

• Tax Benefits: The policyholder is entitled to get tax exemption on both premium payments, maturity and final payouts under the Section 80C and Section 10(10D) of the Income Tax Act, 1961.

• Low Risk: Traditional Endowment policies are considered safer as compared to the other investment option such as the Mutual Fund or the ULIP’s because the amount here is not directly invested in equity funds or the stock market.

Riders available under Endowment Plan

The following benefits can be chosen with an endowment plan, these are optional.

• Critical Illnes: If the policyholder is diagnosed with a critical illness like cancer, heart attack, paralysis, kidney failure, etc. The policyholder will get a lump sum amount.

• Accidental Death: When the policyholder opts for this additional rider, the insurer will pay accidental death benefit in addition to the Death Benefit to be given to the beneficiary.

• Disability: The disability rider proves to be highly beneficial to the policyholder if he/she suffers from a partial or permanent disability.

• Waiver of premium: Through this rider the insured is not liable to pay the premiums of the endowment policy in case the policyholder suffers from a critical illness or permanently disabled.

• Hospital Cash Benefit: Hospital Cash Benefit provides you for daily allowance as well as post- hospitalization benefits, in case of hospitalization of the policyholder.

Disclaimer: The terms and conditions of this rider will differ from insurer to insurer.

Benefits of Endowment Plan

• Provides Insurance Cover: An endowment policy provides insurance cover during the policy term.

• Lump sum payout: It provides a lump sum payout when the policy matures (i.e. at the end of the policy term)

• Serves with a dual purpose: An endowment policy serves you with a dual purpose as it not only works as an insurance policy but also offers you with long term investment benefit.

• Provides you with a Tax Benefit: You are entitled to get tax exemption on both premium payments, maturity and final payouts under the Section 80C and Section 10(10D) of the Income Tax Act, 1961.

• Offers Low-Risk Investments: When it comes to investing, endowment policies are considered as a relatively safer option than other types of investments.

• Offers Long-term savings: An endowment policy offers long term savings. You can choose a policy term ranging from 10, 15, 20, 30 to 40 years.

• Provides option to add riders: With Endowment policies, you get an option to enhance your policy by opting for additional riders like critical illnesses, waiver of premium, family income benefit, accidental death benefit, and accidental permanent total / partial disability benefit.

• Additional Bonuses: Insurance companies also declare bonuses. Here, the bonus is the extra amount of money added to the proceeds, which is distributed to a policyholder by an insurer.

However, policyholder of a with profit policy only is entitled to share in these profits. Also, payment of bonus is conditional on the life insurance company which has surplus funds after expenses, costs, claims have been paid for that year.

The bonuses can be classified as follows

1) Reversionary Bonus: This is the additional money that is added to the amount payable on maturity or death with profit policy. Also, once a revisionary bonus is announced, it cannot be withdrawn even if the policy matures or on the death of the insured person.

2) Terminal Bonus: The insurance company will add a discretional amount of money after completion of a fixed term say 10 or 15 years to the payment made on the maturity of an insurance policy or on the death of an insured person.

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How Does an Endowment Plan Work?

Endowment plans are similar to our regular insurance policies. They not only provide you with a life cover but also help you save on a regular basis. And once the policy matures with the given condition that the policyholder has survived the policy term, he/she will receive a lump sum amount. This amount can be utilized to meet financial needs like purchasing property, children’s education or retirement etc.

Things You Need to Know Before Buying an Endowment Plan

• Begin planning early: When it comes to investing, it is always considered ‘the earlier the better’ as it offers a long horizon for your invest to grow. This, in turn, will help the insured to build a corpus and facilitate disciplined saving.

• Select a plan that offers riders: There are some insurance companies that offer riders as an inbuilt feature and one must never miss to get benefited out of it. Additional benefits would include benefits like education endowment, double endowment policy or marriage endowment policy.

• Review flexibility option: Insurers offering endowment plans provide flexible option i:e. in case an individual is salaried, she/he can choose a regular endowment policy whereas an individual with irregular income may opt for single payment option or limited premium payment option.

• Guaranteed and Non-Guaranteed returns: Apart from offering low-risk insurance and dual benefit of death cover and saving feature, many of these policies also offer a combination of guaranteed and non-guaranteed. The guaranteed returns such as guaranteed additions remain fixed and are payable on death or maturity (as applicable). The non-guaranteed returns include bonuses that are variable in nature and it depends on the investment performance.

• Bonuses: Bonuses will be declared by the insurance company depending on how the company has performed. When the insurer has made profits from its investments, he distributes a part to it to policyholders at the end of each financial year. Besides, profit of the insurance company depends on the valuation of its assets and liabilities.

How to Choose an Endowment Policy?

The market is flooded with different types of endowment policies. But there are several factors an individual should keep in mind while choosing the right endowment policy. Factors like income, an individual’s needs, current life stage, and risk appetite should be considered while choosing an endowment policy.

The cost of the premium is also the deciding factor as premium of endowment plans are costlier as compared to other investment plans. Also, other factors to keep in mind would be the insurance provider’s track record in terms of the bonuses, customer service provided by the insurer, their claim settlement ratio, financial status of the insurer, etc.

In simple terms, you should buy an endowment policy which is simple and does not come with features and benefits which are difficult to comprehend.

What are the documents required to apply for an endowment policy?

Following are the documents required to apply for an endowment policy:

• Photograph
• Age proof
• Address proof/ proof of residence
• Fully filled application form/proposal form

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Endowment Plan FAQ's

What is the right time to buy an endowment plan?

Now is the right time to buy an endowment plan. The sooner you start savings the better will be the benefits that you will receive on the maturity of your endowment policy.

What are Riders?

Riders are additional insurance covers that you may choose while buying an endowment plan. These provide benefits if case of disability, critical illness, additional death etc. The riders come at an additional premium.

Does endowment policy offer tax benefits?

Yes, Sections 80C, and the received benefits fall under Section 10(10D) allowing the policyholder to avail for tax benefits.

Can I buy an endowment plan for my child?

Yes, in this case you are the policyholder and the child will get a lump sum in case of the policyholder's death.

Can I change the beneficiary of my endowment policy mid-way?

Yes the beneficiary can be changed during the tenure of the policy. In this case the insurer needs to be informed.

Do I need a large set of documents to buy an endowment plan?

No, buying an endowment is a hassle free process. You will require just a basic set of documents.

Can I surrender an endowment policy before completion of the policy term?

Yes, an endowment plan can be surrendered after the policy has acquired a surrender value which is usually 2 or 3 years depending upon the policy term and premium payment term. Once you surrender the policy, you will be eligible to receive the guaranteed surrender value or the special surrender value, based on whichever is the higher of the two.

Can I purchase an endowment policy online?

Yes, an endowment plan can be purchased online on the insurance company’s official website. If not on the official website, you can find them offline or on third-party websites.

Can I switch my premium payment frequency from monthly to quarterly or between other options?

Yes, you can switch your payment frequency depending upon the terms and conditions set forth by the insurance company.

Can policyholders choose to increase the sum assured during the policy term in the case of endowment plans?

Yes, policyholders can choose to increase the sum assured, depending on the insurance company’s policy terms and conditions. And if this option is provided to you, it can be done during the important stages of your life like the birth of a child, legal adoption, etc.

Can I buy an endowment policy for someone else?

Yes, you can buy an endowment policy for your spouse or children. As long as you are making the payment and have provided correct documents of proof to the insurance company, it should not be a problem.

When can I withdraw life insurance plan with better returns?

The returns of traditional life insurance plans are usually in the 4% to 6% range, if it is continued until maturity. However, should one decide to discontinue it sooner, then the original maturity amount gets reduced, which eventually brings down the in-hand return. The returns will vary depending on how much money has been invested and the number of years that premiums have been paid for. It is advisable to stay invested for the entire duration of the policy as this will fetch the most returns.

However, if one wishes to withdraw, it is important to remember that the policy’s cash value builds overtime. So, a life insurance plan that has been kept active for long periods is bound to fetch higher returns compared with one whose withdrawals have been made in the initial few years.

Do I need supplemental life insurance?

Availing a supplemental life insurance, in the form of riders, is recommended for those looking to include benefits on top of their base cover. Riders are additional benefits that help modify life insurance to better suit one’s needs. Some of the popular riders that life insurance applicants can consider are Term Rider, Critical Illness Rider, Accidental Total & Permanent Disability Rider and Accidental Death Rider.

An essential point to be noted is that riders will increase the premium outgo, and hence one must factor the element of cost while assessing whether or not to include riders to the base life insurance plan. The rates are usually quite economical.

Which type of life insurance policy pays a lump sum on death but is primarily used to save?

What is a lump sum insurance?

In which policy the insurer agrees to pay the assured or his nominees specified lump sum of money on his death or on the maturity of the policy whichever is earlier?

Is life insurance given in a lump sum?