An endowment insurance plan is one that combines life insurance cover, a savings plan as well as tax benefits. An endowment plan provides a pay out to the beneficiary in case of death during the term of the policy. If the insured survives the term of the policy, then he/she is assured of a maturity amount on expiry of the term. Endowment plans offer a forced saving option in addition to pure protection. The maturity benefit is a form of savings that can be used for any purpose like, for example, funding your retirement, children’s education expenses or weddings.
How are endowment insurance plans different from term plans?
A term plan pays the full value of the policy to the beneficiary in case of death of the policy holder during the term of the policy. If the policy holder survives the term, he/she is not eligible for any payout. This is the simplest form of life insurance and is also the cheapest in terms of premium costs.
An endowment plan, on the other hand, has an element of savings as well and the policy holder gets a lump sum on maturity if he/she survives the term of the policy. The premiums of all the subscribers to the endowment plan are pooled together and invested by the insurance company. The investment policy follows the rules laid down by the regulator and the returns are declared on an annual basis.
What are the advantages of an endowment insurance plan?
1. It offers a guarantee on your capital: Even if the market is volatile, endowment plans ensure that you will receive your capital at the time of maturity.
2. Bonus payments: The returns on the investment are declared by the insurance company at the end of the financial year and is credited to your insurance account.
3. Liquidity: Some endowment insurance plans allow you to make a partial withdrawal from your account to deal with financial emergencies. Similarly, you may be able to take a loan against your endowment plan.
4. Tax benefits: You can enjoy the benefits of tax saving by investing in certain endowment plans.
5. Low risk:Endowment plans are traditional, low risk options that provide insurance cover as well as investment opportunities.
When should you go in for an endowment plan?
If you have a regular income that you are reasonably sure will continue through your working life, then this might be a good, low risk option insurance plan to get. A steady income is an important factor in choosing this kind of plan as you will be making contributions on a regular basis for a long period. An endowment plan can typically stretch from 5-20 years and you should be able to make consistent payments throughout this period.
If you have an irregular income stream, then you could opt for a single pay option or could choose term insurance instead.