In InsuranceSamadhan.com’s A-Z Blog series on Insurance topics, we try to provide all vital information related to the Insurance sector and demystify certain myths related to the sector. In today's blog, we are sharing detailed information regarding Endowment Insurance policy – its meaning, features, merits and demerits.
Endowment means saving for a purpose. Literally Endowment is a fund which can be used to generate regular income for a charitable purpose.
Traditionally all savings are done to create an Endowment Fund. Later in the beginning of 19th century, Insurance and savings was linked and Insurance companies promoted Endowments Funds where Insurance cover was given on death and Endowment fund was given on survival.
What is Endowment Insurance?
Endowment Insurance Meaning: Each earning member of family has financial goals and each goal require regular saving so that an accumulated amount is paid for completion of financial goal. For example, Ashok, aged 30, wants Rs 20 lakh to create a fund at age 50 for higher education of his son. Ashok will be able to accumulate Rs 20 lakh if he saves Rs 1 lakh each year. But what will happen to endowment fund if Ashok dies after 5 year?? Here comes Endowment Insurance which gives entire Rs 20 lakh to nominee of Ashok so that purpose of saving is achieved.
Ashok can achieve his endowment objective through many options like recurring deposit in bank, mutual funds, post office schemes but endowment insurance comes with unique benefit of Guaranteed completion of the purpose of endowment under circumstance detailed below:
- Endowment fund in case of death
- Endowment in case of survival
Features of Endowment Life Insurance Plan:
- Your purpose of saving is done with a sum assured which is guaranteed amount to be paid in case of survival or death.
- You must increase the death cover by adding accidental and disability cover.
- You can choose premium payment term depending on your capacity to pay. If you have limited liability now then go for limited payment option because tomorrow your liability may increase.
- Don’t go for any mode except the annual mode. There is a cost to modal payment. You pay approx. 8% more if you premium in monthly mode, 6% more if you pay in quarterly mode and 4% more if you pay in half yearly mode. So why pay Rs 108 when you can do with Rs 100. Moreover, there will be taxes on extra modal charge.
- You do not get any bonus on extra modal charge because your bonus is linked to sum assured which remain same under all modes.
- All plans like Money Back, ULIPS fall under Endowment Insurance.
- Term and whole life plans are not endowment insurance.
- Please note that premiums paid are eligible for tax rebate if your sum assured is higher than 10 times of annual premium. For example, if you are paying a premium of Rs 60000 then sum assured should be more than Rs 6 lakh.
- Maturity sum assured would also be tax free under section 10(10) D only if sum assured is more than 10 times of annual premium.
- As per the trends, you get higher bonuses if you have chosen endowment on long term basis in comparison to short term. For example, a 20-year plan can get you a bonus of Rs 34 per thousand in comparison to Rs 28 per thousand for 10-year plan.
Merits and Demerits of Endowment Insurance
- Unique feature will always be guaranteed fulfillment of the purpose of insurance.
- However, your returns will always be lesser than other options available. This can be explained – when you pay your premium of Rs 1 lakh then Rs 15000 goes towards insurance and other expenses and return of 6% is generated on Rs 85000 only thus you lose Rs 900 towards interest. So, this guarantee comes with a cost.
- In case you are not able to pay the premium then you will not be able to achieve the purpose. Hence it requires a great discipline.
- If you stop paying the premium, then your policy comes in lapse mode and generates a surrender value.
- This surrender value calculation begins from 3rd year and done through a surrender value factor. This SV factor keep increasing with the age of policy. So, in 3rd year this SV factor will be 30% of paid premium less first premium. For example, if premium is Rs 1 lakh per year and you do not pay 4th premium then surrender value will be 30% of Rs 2 lakh i.e Rs 60000 though you have paid Rs 3 lakh. However, if you have paid 10 premium and did not pay 11th then surrender value will be 65% of Rs 9 lakh i.e Rs 5.85 lakh.
- By the time of maturity, guaranteed surrender value increase to almost 100% of premium paid.
So, Endowment Insurance is a great tool of saving now question arise that who should buy it:
- Anyone who is not disciplined should go for Endowment because it is forced saving. You also know that if you do not save then you will not receive all accumulated amount.
- Those who wants to avail tax rebate under section 80C. Though returns are low but you are availing tax benefit.
- For children financial goals like higher education, marriage, Children Endowment are best suited because it comes with a built-in premium waiver. Children future remain guaranteed in case of death of payor. It also has unique features like premium waiver, monthly income as well as money for higher education and marriage.
So, go ahead and balance your portfolio with Endowment Insurance. Reach Insurance Samadhan for any case of lapsed policies because 50% of Endowment Policy owners do not pay regular premium and policy go into lapse. Such policies still have value and we can help you in recovering that.
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