What is an Endowment Policy – Eligibility Criteria, Benefits and How to Buy

Most of us need professional assistance during financial planning. Queries such as where to invest, how to invest, which is the best option for me and my family, and several other similar questions cloud our judgments. An endowment policy can solve most of these problems as it comes with the dual benefits of a life insurance policy and savings plan.

In this article, you will learn about endowment policy, how it works and the best endowment plans available in India.  Keep reading!

What is an Endowment Policy?

An endowment policy is a type of life insurance plan which combines the concepts of insurance and savings. As there are two benefits coupled within one plan, there are two different scenarios under which each will be effective. It offers maturity benefits and/or death benefits based on the applicable scenarios. 

How Does an Endowment Plan Work?

An endowment plan allows you to save a certain amount of money over a fixed period or tenure. Although it is quite similar to a savings plan, the key difference is the monetary benefit offered at the time of withdrawal. 

If the policyholder survives the policy tenure, they will be able to withdraw the accumulated amount as a maturity benefit. However, if the policyholder meets with a sudden or untimely demise, the nominee will receive the amount as a death benefit. Hence, this policy can benefit both the policyholder as well as his/her family members or dependents. 

Features of an Endowment Policy

Here are some notable features of an endowment policy:

1. Death and Maturity Benefit
   If a policyholder outlives the policy tenure, he/she will get a maturity benefit. In case of a policyholder’s untimely demise, the nominee will receive a death benefit and bonuses (if any).
2. Flexible Premium Frequency
   The policyholder is free to pay premiums either monthly, quarterly, semi-annually or annually. 
3. Higher Returns
   An endowment policy provides the policyholder with a savings plan as well as insurance benefits. Hence, the wealth built over the tenure is generally higher than that of a pure life insurance policy.
4. Rider Options
   There are rider options available that can be added to the base plan in order to enhance your policy benefits. Riders such as critical illness riders, accidental death or total permanent disability come with significant benefits. Also, some plans offer premium waivers with permanent disability and critical illness riders.
5. Low Risk
   Endowment policies are considered to be a safer option than other investment options, such as mutual funds or ULIPs, as these don’t directly invest in market-related instruments. 
6. Tax Benefits
   The policyholder is eligible for tax benefits on both premium payments and maturity benefits under Section 80C and Section 10(10D) of the Income Tax Act.

Also Read

How to Apply for Loan Against Insurance Policy?

What is Endowment Fund, Features and Restrictions on its Usage

Types of Endowment Plans

Now that you know how an endowment policy works and its features, you should know about its different types. There are five different types of endowment policies:

1. Guaranteed Policy

As the name suggests, a guaranteed policy assures the policyholder of a maturity benefit. Hence, if the policyholder outlives the tenure, he/she will receive the maturity benefit. In case there’s a sudden demise of the insured, the beneficiary will receive the sum assured.

2. Unit-Linked Endowment Plan

In this type of endowment plan, the premium that you pay towards the plan is invested in two parts. One part goes towards the insurance plan, and another part is invested towards various investment instruments as picked by the policyholder at the time of entering the plan. This plan is riskier than a guaranteed policy, as market-related investments are involved. 

3. Full Profit Plan

With a full profit plan, the insured receives a predetermined sum assured, which is guaranteed right from the beginning of the policy. The insured might receive a bonus as well with the maturity amount. The nominee would receive the same in case of the untimely demise of the insured. 

4. Non-profit Plan

This plan does not provide any bonuses; hence, it is referred to as “non-profit”. The insured will only receive the sum assured upon maturity, or the beneficiary will receive a death benefit. 

5. Low-cost Plan

A low-cost endowment plan allows the policyholder to accumulate wealth over a specific period. This period comes as a lock-in period only after which your policy will mature. In case the policyholder passes away before the lock-in period, the beneficiary will receive the target amount as the sum assured.

Eligibility Criteria for Endowment Policy

These are the eligibility criteria that you should be aware of before deciding on purchasing an endowment policy: 

• A basic endowment plan has a minimum age criteria of 18 years. However, some plans may allow the purchase of a policy as soon as an individual is born. 
• The maximum age for purchasing an endowment policy is 60 years. Hence, you can invest in this plan for retirement planning. 
• The minimum age for a policy to mature is 18 years. Therefore, if your parents had invested in an endowment plan when you were minor, it would help you finance your higher education. 

Documents Required to Apply for an Endowment Policy

Along with the duly filled-up application form, a policyholder will also need to submit the following supporting documents: 

• Photograph of the policyholder 
• Proof of residence 
• Proof of age 

How to Buy the Best Endowment Plan in India?

There is no scarcity of options available in the market, but not all policies might be ideal for you. There are certain factors that influence the premium and tenure of your policy. These factors can be your age, income, lifestyle habits, etc. Hence, you need to be aware of your requirements before choosing an endowment policy. 

Apart from this, you should consider choosing a policy provider who will work out the best for you. Check the customer reviews of the insurer, how long they have been in the industry and most importantly, their claim settlement ratio. 

The premiums for an endowment policy are usually higher than other types of insurance policies. Hence, you should also be careful while adding the riders and determining the sum assured so that the premium amount stays within an affordable range for you. 

In addition, do not forget to pay attention to every tiny detail mentioned under the terms and conditions so that there is no hassle while claiming the benefits. 

Best Endowment Plans Available in India in 2023

Here is a list of the best endowment plans available in India in 2023. The list is sorted in descending order as per the claim settlement ratio of the insurers.

What to See When Buying an Endowment Policy?

An individual should consider looking into these factors when buying an endowment policy:

1. Starting early brings multiple benefits to the policyholder. First, you will get a longer time duration to build more wealth over time as you reap the benefits of compounding. Also, this allows one to engage in disciplined saving or investing. 
2. An endowment plan includes flexible payment options, such as regular and singular payment options. While the regular payment option might be suitable for salaried individuals, some might find the single payment option to be more appropriate. Review your options before purchasing. 
3. There are several types of endowment plans available in India. If you are planning to invest in one, make sure to do your research and find the one which seems the most ideal for you. 
4. Know about the riders or add-ons offered by your insurance provider. Riders enhance the benefits of your policy; hence, you should find the one you think might benefit you in the future. A lot of insurers offer riders such as education endowment, double endowment policy, critical illness rider, a permanent disability rider, etc. 
5. Some insurers provide bonus facilities on specific types of endowment policies. A bonus is a percentage of the profits generated from the policy at the end of one financial year. 

Benefits of Endowment Plan

Endowment policies offer several benefits to a policyholder. Some of them have been discussed below: 

• Endowment policies come with dual assurance. While it makes sure that you will receive a lump sum amount upon maturity, you will also carry the mental peace that your loved ones will be taken care of in your absence. 
• You can avail of multiple tax benefits with an endowment policy. For example, you can avail tax deductions under Section 80C of the Income Tax Act on premium payments. You can also avail tax benefits on the maturity amount. 
• Insurers also offer the option to add riders to your basic endowment policy, which enhances the benefit of your policy. In addition, some riders, such as critical illness riders and accidental permanent disability riders, help in waiving the premium upon meeting the terms and conditions. 
• An endowment policy comes with low risk, which means your corpus grows with a lower risk of loss, depending on the type of plan. Additionally, you get a sum assured, which is guaranteed. 
• A policyholder can avail a loan against their endowment plan after completing a certain duration of tenure. 

Limitations of Endowment Policy

Endowment policies come with dual features of insurance and savings plans. It also offers tax benefits to the policyholders. However, this policy also has some limitations or drawbacks, which you should know about before making any decision. 

• Endowment policies come with higher premiums when compared to other life insurance products. 
• The return on your investment will be of moderate amount. The returns from other market-linked instruments tend to be higher than that of endowment plans.
• If you are purchasing an endowment policy, you will get coverage for a limited period of time. Also, usually, these are not renewable or convertible. So, if you want to stay insured after its maturity, you will have to invest in other plans or policies. 
• Bonuses are not assured. Some insurers do not offer this feature, while some do. Bonuses might get added at the end of one financial year, and it depends on the profit of the company. 

Things to Consider Before You Buy an Endowment Policy

Plenty of policy providers offer endowment plans, as it is one of the most popular insurance plans. But how to choose the right one for you? Here are some things you need to consider before you buy an endowment policy: 

1. Claim Settlement Details

One of the most important things to determine while choosing an insurer is their claim settlement ratio. It is the ratio between the number of claims made by policyholders and the number of claims settled. This also reflects how efficiently the claim settlement process of an insurance company works.

2. Premium Amount

Endowment policies are usually set for the long term, which means you have to pay premiums for an extended time period. Therefore, you should carefully determine your premium amount so you can continue paying your premiums without default. Missing out on premium payments can lead to the cancellation of a policy.

3. Financial Background of the Insurer

Checking the financial background or status of the insurer is really important, as it will also have an impact in case you make any claims. Consider checking the solvency ratio of an insurer to get an idea about their financial stability. 

4. Investment Goals

Lastly, you must make sure that your investment goals and horizon match that of the plan. There are so many options, and all might not work out for everyone. Hence, make sure to choose plans as per your investment objectives and not vice-versa. 

Also Read

Personal Accident Insurance – Top Plans, Benefits and Claim Process

Top 5 Single Premium Policy in 2023 – Its Working and Benefits

Final Word

An endowment policy helps you build a savings fund by making regular investments over time. This low-risk policy option offers the combined benefit of investment and insurance, which helps to protect your family’s financial future. Make sure to keep all the above pointers in mind before playing for an endowment policy.

FAQs