What is an endowment policy and when should you go for it
By Sanjeev Sinha
Do you frequently buy things, even expensive stuff, just for the sake of buying? Even when you do not really require them? However, you are unable to cure yourself of your purchase-mania and consequently find yourself unable to save for your future needs? If that is the case, you are a habitual spender and endowment insurance is just meant for persons like you.
Features of an endowment policy
An endowment policy is essentially a life insurance policy which, apart from covering the life of the insured, helps the policyholder save regularly over a specific period of time so that he/she is able to get a lump sum amount on the policy maturity in case he/she survives the policy term. This maturity amount can be used to meet various financial needs such as funding one's retirement, children's education and/or marriage or buying a house.
A life insurance endowment policy pays the full sum assured to the beneficiaries if the insured dies during the policy term or to the policy holder on maturity of the policy if he/she survives the term.
Thus, "any life insurance plan with a saving component and lump sum maturity benefit can be termed as an endowment plan. That can be a unit linked insurance plan (ULIP) or a non-ULIP. However, in common parlance, only a non-ULIP saving-linked life insurance plan is referred to as an endowment plan," says Dr P Nandagopal, founder & chief mentor of financial services start-up OpenWorld Money.
Endowment plans, thus, fulfill the dual need for a life cover and savings under a single plan. They are one of the traditional forms of life insurance plans available in the Indian market.
Endowment policies are basically of two types - with profit and without profit. Within these two classes there are many variations of endowment plans structured to meet the need of child education, whole life protection and pension, among others.
"The key benefits of any endowment plan include financial protection of loved ones, goal-based savings, tax benefits under section 80C and 10(10D) of the Income Tax Act and the options to obtain loan against the policy, in case of any financial emergency," says Rushabh Gandhi, director - sales & marketing, IndiaFirst Life Insurance.
Who should consider buying endowment policies?
According to experts, people with a regular stream of income and need for a lump sum amount after a period of time may consider buying an endowment plan.
"Endowment plans provide a disciplined route for savings, which could come in handy in case of a financial emergency. Salaried people, small businessmen and professionals such as doctors and lawyers should look at this plan to meet their long-term financial security needs. Also, people who are risk averse and do not mind settling for lesser return than taking additional risks should go for endowment plans. In that sense, endowment plans are essentially for the common man rather than for the super rich," observes Dr Nandagopal.
However, those solely interested in life cover and not in the saving
component, should rather go for a term plan. This is because not only are term plans much cheaper - providing more coverage for lower premiums - than endowment plans, they are also simpler to understand.
In what circumstances should endowment plans be bought?
Every individual needs some risk-free assured investments as part of one's portfolio. "Endowment plans, therefore, should be bought by individuals, one, to protect and ensure their loved ones financially; two, for goal-based savings; and three, to build a corpus to fulfill an investment objective over a long period," says Gandhi.
However, such type of regular premium plans should be bought only when the policyholder is reasonably certain about a steady flow of income which would help him/her pay premiums regularly, "Since these plans are long term in nature, the longer the policy period, the better the overall benefit would be. So, people with irregular income may take flexi pay/single pay plans, but not the regular pay endowment plans. The key words here are "long term" and "regular" savings. Endowment plans work better if these two are taken care of," informs Dr Nandagopal.
Why should endowment plans be bought?
Endowment plans offer a disciplined way of saving money for future financial needs. An added advantage is the life risk cover which would be of great help to the family if something untoward happens to the main bread winner. The returns may be lower, but they are mostly risk free in case of guaranteed sum assured. Tax benefits, subject to certain conditions, are also available on these returns.
This explains why endowment plans are preferred by risk-averse investors as besides providing cover to an individual's life in case of an eventuality, they also give the maturity amount to the policyholder if he survives the policy.
What to check when buying an endowment policy?
Like many other types of insurance plans, there are a plethora of endowment policies available in the market today. Choosing a suitable policy will depend on many factors, including your current life stage, individual need, income and risk appetite.
In the case of endowment plans, however, you also need to check the premium rates of various endowment plans as they are expensive compared to term plans. Therefore, a mistake here will cost you more in the long term.
After comparing the premium rates, the next important thing to check is the insurance company's track record with respect to bonus payments. "Most endowment plans give lesser returns than ULIPs, but the endowment plans are considered safer. However, returns being an important factor for deciding on saving options, customers should know about the bonus rate. Also, try translating it into a simple ROI to know the relative worth of the endowment plans," advises Dr Nandagopal.
Other important considerations are the claim settlement ratio, customer service track record and financial standing of the insurance company. Try to pick an endowment plan which is simple and easy to understand. Further, avoid policies with complex features and benefits, unless you are able to understand them very well, because there could be some catch in the fine print, caution experts.