An endowment life insurance plan is a kind of insurance policy where the premium is paid for the entire duration of the policy and when it matures, the policyholder receives a lump sum amount of money. Death benefits are also paid out if the policyholder dies within the policy period. An endowment plan can also be surrendered mid way and a surrender value can be claimed. In other words, an endowment life insurance plan provides both cover and investment.
How does an endowment plan work?
Let us take an example to understand this. Mahesh buys a life insurance plan of Rs.20 lacs for 25 years. He pays the yearly premiums for 25 years, at the end of which he receives the maturity benefit, which is the sum assured along with the bonuses, if any. However, if Mahesh had died within this time, his nominee would receive the sum assured and the policy would terminate then and there.
What are the different types of endowment plans?
There are different types of endowment plans. While we have the traditional endowment plans, like the one Mahesh had purchase, we also have money back plans, marriage endowment plans, child endowment plans, education endowment plans and so on. These types of endowment plans allow you to opt for a steady flow of income throughout the policy period. You can opt to get, for example, 10% of the sum assured 5 years into the plan and the rest at the time of maturity. These plans help people deal with financially challenging situations that may arise due to various reasons.
Who are the people who benefit from an endowment plan?
People with a medium risk appetite and who want guaranteed returns benefit greatly from the endowment insurance plans. Since the endowment plans have a fixed return component, many people like purchasing endowment plans as opposed to ULIPs. A policyholder also has the option of buy a participating plan by agreeing to pay a higher premium. In such a plan, he will be entitled to the bonuses along with the sum assured. An endowment insurance plan is also essential for a person who has dependent family members. An endowment plan will help him to pay for the various expenses like his childrens education, marriage, etc at various points in time.
Why Endowment Plan?
Endowment insurance plans have been favored insurance tools for a lot of people for a number of reasons. The biggest advantage of an endowment plan is the fact that the plan provides cover as well as a platform for investment. An endowment plan also provides you the chance to save and receive money when you need it the most. Let us take a look at some of the biggest reasons for the popularity of endowment plans.
How does an endowment plan help in building a fund?
An endowment plan works in a unique way. It help the policyholder in building up funds for specific life events like retirement, childs marriage, etc. You can buy an endowment plan and opt to get parts of the sum assured at desired points in time. Let us take an example. Asokes son Varun is to get admitted into college exactly 20 years from the time he buys the policy. Asoke plans accordingly and receives 25% of the sum assured at that time. It helps him to pay for the college admission fees. Then, he opts to receive another 25% of the sum assured 10 years from then, at the time of Varuns wedding. The remaining 50% he receives 10 years later, when he retires.
An endowment plan proves to be a great source of saving as well. It is particularly good for people who find it difficult to save in and maintain a savings bank account. An endowment plan sort of forces you to save and all this happens while your life is covered.
Do endowment plans provide tax benefits?
Yes, endowment plans do provide us with some very attractive tax benefits and this is another reason why endowment plans are popular. The entire amount received as the maturity benefit is non-taxable under section 10D(D). This proves to be helpful as you usually receive the amount when you need the cash badly and getting the maximum possible lump sum amount of money helps. Also, premiums up to Rs.1lac are tax exempted under Section 80C.