Things to know before buying an endowment plan

Phrases like term plan, endowment assurance policy, and superannuation are common ones in the world of insurance. While you may have heard such insurance jargon being thrown around often enough, you may not know precisely what these words refer to and what the implications of buying such plans would be. If you are curious about one of India's most popular savings and insurance instruments, namely the endowment plan, you are at the right place to know more.

What is an endowment plan?

Finance mogul Warren Buffett has emphasized the need to find a way to make your money work for you. By using savings plans such as an endowment assurance policy, you can reap the benefits of saving systematically, putting your money to work for you, and receiving periodic pay-outs to help you meet financial milestones along the way.

People often confuse financial freedom with wealth creation. Before you build wealth, you have to gain financial freedom, which means having little to no debt, managing your money well, lowering expenses, increasing savings, and making smart money choices.

The word 'endowment' refers to getting something of benefit. An endowment plan or endowment assurance policy is a life insurance product that gives life cover, periodic pay-outs or endowment amounts, and guaranteed earnings at the end of the endowment insurance plan.

When the policy term ends, the endowment insurance plan attains maturity and maturity benefit is paid to the policyholder. Typically, this amount amount is the percentage of the sum assured along with accrued bonuses in case of a participating plan.

In case of the untimely death of the endowment plan holder during the term of the policy, the entire sum assured is paid to the nominee as a death benefit irrespective of how many survival payments have been made in the plan. As such, an endowment assurance policy offers you a single solution to meet multiple financial needs.

What are the types of endowment policy and plans?

Endowment insurance plans are popular savings-cum-insurance products in India. Depending on your needs and financial goals, you can choose from different types of endowment policy options. When it comes to comfortably meeting periodic financial milestones, an endowment plan is a sound financial choice. Consider your risk appetite before zeroing in on one of the types of endowment policy options to buy.

Unit Linked endowment plan

A unit-linked endowment plan provides you life cover for the duration of the endowment insurance policy. The premiums you pay in such types of endowment policy are directed towards two components—the life cover and market-linked funds.

A unit linked endowment insurance policy premium is used to purchase units in multiple investment funds with different risk-return ratios. You stand to reap the benefits of the upward momentum of the capital market while also receiving life cover and periodic endowment plan pay-outs.

Full endowment insurance plan/With-profit endowment plan

A full endowment plan is typically a participating, non-linked endowment assurance policy that provides life cover along with the entire sum assured that was agreed upon at the time of buying the endowment assurance policy. As participating plans, such types of endowment policy options offer bonuses if the insurer announces any.

Typically, a participating endowment assurance policy features a simple reversionary bonus and terminal bonus (if any). If the insurer does declare a bonus, then the final full endowment plan pay-out, including accrued bonuses may be more than the agreed-upon sum assured at the time of policy maturity or death of the policyholder.

Low-cost endowment plan

In a low-cost endowment plan, the premium amounts are designed to be affordable. This endowment plan is a good option for creating a corpus within a defined time frame.

Without-profit endowment plan

Also known as a non-participating endowment assurance policy, such types of endowment policy alternatives are perfect for those who want guaranteed returns at periodic intervals or the end of the endowment plan. As a non-participating plan, there are no bonuses offered in such types of endowment policy.

However, the maturity benefit or death benefit attached to the endowment plan is a fixed amount. These types of endowment policy options are perfect for those who want to create a robust safety net for their family members in the policyholder's absence.

What are the features and benefits of an endowment assurance policy?

An endowment plan is a perfect fit for those looking for security and support for their future financial endeavours. If you tend to be a spendthrift or have trouble saving money, an endowment plan is the right one for you. This is because an endowment assurance policy provides a systematic roadmap for disciplined and consistent savings.

If you know that you are likely to need a substantial amount of money in a few years, an endowment plan allows you to begin meeting your future financial goals today. With an endowment assurance policy, you save a fixed amount of money consistently and get it back when you need it.

Knowing the various endowment insurance benefits and features beforehand can help you make an informed financial choice for yourself. These are a few salient features of an endowment plan.

Life coverage

An endowment plan pays out the sum assured in a lump sum amount or periodic instalments to the nominee in case of the policyholder's untimely death during the tenure of the endowment plan. The benefit of life cover is necessary for your peace of mind and safeguarding your family members' financial future in your absence.

Survival benefits

One of the unique features of an endowment assurance policy is that you stand to receive guaranteed or assured benefits upon policy maturity. When the policy tenure ends, the policyholder gets a predefined sum assured as a maturity benefit.

Premium payment flexibility

With most types of endowment policy options, the policyholder can decide upon premium payment terms as per their convenience. You can opt for monthly, quarterly, half-yearly, or yearly endowment plan premium payment mode. Depending on the endowment assurance policy, you may also have the option of making a single premium payment at the start of the endowment plan.

Premium payment flexibility

An endowment assurance policy is a popular savings tool because it offers tax benefits on the premiums paid. The tax benefits you can reap depends on the prevailing tax norms in the country.

Risk appetite

Barring the unit-linked endowment plan, the other types of endowment assurance policy options are not subject to market risks. As such, the volatility of market performance has little impact on the conventional non-linked endowment plan and presents a low risk for the investor. With guaranteed additions, an endowment plan facilitates the creation of a corpus for risk-averse investors.

High returns

In a participating endowment assurance policy, the simple reversionary bonus and terminal bonus (if announced) further enhance the sum assured to create a more substantial corpus than what is offered in most traditional insurance plans.

Additional riders

An endowment insurance plan features life coverage and the option to add riders to make your insurance cover more comprehensive. Add-ons or riders are additional purchases that offer benefits in case of accidental death, total or partial disability, critical illness diagnosis, waiver of premium, etc.

Periodic pay-out provision

Perfect for meeting short-term financial goals such as paying for a car, renovating your home, or paying for children's school expenses, an endowment plan may offer guaranteed pay-outs released at periodic intervals.

Why is an endowment assurance policy the perfect saving plan for you?

The prospect of retirement and capital expenditure for the needs of your children is a looming one. You may hope to create a financial portfolio that will meet all of these future needs with ease. More often than not, it is the smaller milestones that trip you up while you're focusing on the big picture. There are school fees to pay, an emergency fund to create, a payment to put down on the house, and family holidays to plan. Where does the money to meet these expenses come from? Paying for these milestones should not come at the cost of meeting more important financial goals in your life.

An endowment assurance policy ensures that you put aside money to meet all of your current and future financial goals by helping you save systematically and providing you with a corpus when you need it the most.

IndiaFirst Life endowment insurance plans cover the whole gamut of savings and protection needs. The IndiaFirst Life Cash Back Plan offers long-term investment benefits with limited premium payments and guaranteed pay-outs at regular intervals. The IndiaFirst Smart Pay Plan, IndiaFirst Life Guaranteed Monthly Income Plan, IndiaFirst Life Long Guaranteed Income Plan, and IndiaFirst Life Guaranteed Benefit Plan fit the bill if you are looking for guaranteed benefits from your endowment plan. Choose an endowment plan based on your needs, risk appetite, and the features and facilities being offered by the insurer.