Buying An Endowment Policy? Here’s What You Should Know
Endowment plans are best suited for the customers who desire stability and financial protection for their future savings. Endowment policies provide a disciplined savings plan over a period of time for a future need along with a life cover that protects the future projected savings for the family in the event of the untimely demise of the policy holder.
If you’re thinking about buying an Endowment Policy, here are some things you should know-
Types of Endowment Policies
There are majorly two types of Endowment Policies – Participating and Non-Participating. Participating plans take part in the profits of the Insurance Company, earning bonuses, whereas, Non-Participating plans do not take part in the profits of the Insurance Company. What this means for the customer is that part of the returns in a participating plan would depend on and include the profits that the insurance company makes on the said plan whereas for non-participating plans the returns are mostly fixed and declared at the onset of the policy.
Further, endowment polices are designed in several ways to help suit the specific needs of various customers such as children’s education, future marriage, retirement, etc.
To increase liquidity for customers a variation of endowment polices, namely Money back policies are available. These policies are popular as they have a certain percentage of the maturity paid to the customer at periodic intervals before the actually maturity term.
ULIPs can also be termed Endowment plans because they offer a maturity benefit, but since the returns are market based they are not Traditional Plans and thus are considered as a separate category of Life Insurance Plans.
Another way to classify these plans would be based on the Premium payment – Single / Regular. In single premium plans the entire premium amount for the policy is paid one time at the start of the policy, post which no premiums are required to be paid; the maturity amount of the policy is then paid after completion of the stipulated term. In Regular premium plans the policy premium needs to be paid periodically every year till the completion of the policy term to get full maturity and benefits of the plan. In the current environment companies have also designed limited premium payment plans where the customer needs to pay premium for a shorter duration than the maturity term of the policy.
Riders
Riders are additions to a base policy. They can offer extra coverage on diagnosis of a critical illness, on accidents, or income benefits on death of the life assured, etc. These riders can be taken up on additional payment of premium. Sometimes plans may include a rider as an inbuilt feature too.
Low Risk
Traditional Endowment policies carry a lower volatility risk compared to Mutual Funds or ULIPs where the fund value is adjusted daily based on the market returns of the underlying investments. In Participating Endowment plans, investment return is allocated annually by means of bonuses. Once declared the bonus returns are locked-in, and cannot be taken away. Death benefits consist of a pre-determined guaranteed amount as well as bonus allocations. In Non-Participating plans the maturity and death benefits are fully guaranteed to you at onset.
Tax Benefits
Endowment plans qualify for Income tax exemption under Section 80C provide the life cover provided is 10 times the annual premium paid. These polices would go on to qualify got tax free returns on maturity under Section 10(10 D) of the Income Tax Act, 1961.
It is important to note that endowment plans provide best returns and protection when used for long-term savings. In most cases the plans require a premium to be paid regularly over a period of years. Thus for customers opting for these plans need to verify the ability to be able to pay premium over the years should also be considered to avoid the policy lapse.There are several factors to be considered before you decide which policy to buy, such as your personal needs, your income, risk appetite, current life stage, future needs, etc.
