An Endowment Plan provides dual advantage of life insurance coverage & long-term savings offering guaranteed returns. Under this plan, a policyholder is required to save a certain amount regularly for a certain period to get a lump sum amount at the time of maturity in case they survive. Some part of the premium amount is diverted towards life coverage, & the remaining part is accumulated as savings.
This plan is considered to be the Best Investment Plan in India amongst many investors, which helps you inculcate the habit of disciplined savings. This is because it offers policyholders guaranteed & assured maturity proceeds with life coverage. This plan involves the payment of a premium regularly in exchange for two outcomes, as mentioned below:
- In case the policyholder survives the policy tenure, they will get maturity benefits in a lump sum.
- In case the policyholder dies at any time during the policy tenure, the nominees will get the death benefits.
How Does an Endowment Plan Work?
Provided is the step-by-step guide which will help you through the endowment plan works.
Step 1: Choose Your Policy & Coverage Amount
As there are many endowment plans available in the market, a policyholder should look for a plan with a sum assured that best aligns with their family’s needs. The premium amount will be allocated depending on the amount covered, i.e. sum assured & policy tenure. In case the policyholder survives the policy tenure, the entire sum assured would be received along with the maturity benefits.
Step 2: Decide the Premium Payment Frequency
One should also consider the premium payment frequency while buying an endowment plan. These plans are available in monthly, quarterly, half-yearly, & annual formats, where a policyholder should choose one depending on their income streams.
Step 3: Accumulate Wealth over the Policy Term
Making regular premium payments not only inculcates a habit of disciplined savings but also helps the accumulation of wealth over the policy tenure.
Step 4: Maturity Benefit Payout
If the policyholder does not meet any unfortunate condition during the policy tenure, the policyholder will get the maturity benefit from the insurance company at a predetermined amount, irrespective of the market conditions.
Step 5: Death Benefit for Financial Security
This plan involves a life component that assists the policyholder’s family whenever required by providing them with financial security. This means that in case of the sudden & unfortunate death of a policyholder, their nominees will get the death benefit to assist them financially, hence providing financial security.
Step 6: Tax Benefits & Finance Planning
Better tax planning always results in smart financial planning. This can be well explained with the help of taking an example of a life insurance plan, which includes an endowment plan as well. The premium paid towards the plan is eligible for a tax deduction u/s 80C of the Income Tax Act, 1961. Additionally, the death benefits received by the nominees are also exempt from tax u/s 10(10D) of the Income Tax Act, 1961.
Eligibility Criteria
Provided are the eligibility parameters that should be met to buy an endowment plan:
- The minimum age to buy an endowment plan is 18 years, 91 days in case of child endowment plans.
- The maximum age ranges between 55 & 65 years.
- The policy tenure ranges between 5 to 30 years.
- An individual should assess their income prior to checking the affordability of the premium amount.
- In case of old applicants or a high amount of sum assured, the insurance company may require medical examinations to be performed.
- An insurance company may also consider the nationality of the applicant, which may vary from one company to the other.
Reasons to Buy Endowment Plans
Provided are the reasons an individual should plan to buy an endowment plan:
- These plans will suit risk-averse individuals, i.e., those who are reluctant to take risks.
- It helps boost savings to deal with future financial obligations.
- Besides savings, it also provides life insurance coverage for the dependent family members.
- These plans also provide tax benefits under section 80C & section 10(10D) of the Income Tax Act, 1961.
- These plans also offer life insurance coverage in case of any unfortunate event.
- As they are risk-free investments, they offer lower returns.
- It also offers maturity amount to the insured in case he survives the policy.
Factors Affecting an Endowment Plan
Provided are the factors affecting an Endowment Plan:
- Age
Young individuals are required to pay a lower premium amount in comparison to older individuals because of less risk associated.
- Gender
The insurance premium for women would be lower than that for men.
- Medical Records
While calculating the premium amount, insurance companies consider past & present medical records to assess future medical illnesses, which affect the premium & coverage.
- Family History
An individual with a serious medical issue, like heart-related diseases, cancer, etc., will affect the prospective premium costs.
- High-Risk Activity
High-risk activities, which include smoking, drinking alcohol, etc., also affect the premium amount.
- Policy Tenure
A long policy tenure & a high coverage amount increase the liability of the insurance company, further increasing the premium amount.
- Premium Payment Frequency
The premium payment frequency, i.e. monthly, quarterly, or annually, also affects the total cost & cash flows.
- Riders & Add-ons
This plan allows the upgradation of the basic plan at an additional cost to enhance the current features of the plan.
- Surrender & Loan Provisions
If the plan is surrendered early, it will reduce the returns, whereas loans, on the other hand, will offer liquidity, reducing the final amount of payout.
Conclusion
Endowment plans provide a policyholder with dual benefits of insurance & investment, hence letting them meet long-term financial objectives. This plan allows a policyholder to build a considerable corpus & inculcate a habit of discipline by saving regularly. As there are many types of endowment plans available, they help achieve the financial objectives in terms of periodic returns, long-term security, wealth creation, etc.
Before buying a plan, one should analyse the financial objectives, personal needs, & risk tolerance. One can make a well-informed decision to choose the best suitable plan depending on their requirements & financial objectives, hence offering mental peace.