what is endowment plan?
END + OWEMENT = ENDOWMENT
This post will help you to understand what is endowment plan. I am writing this blog in very simple language to make it easy for everyone to understand.
what is endowment plan?
The name itself has the meaning of the word Endowment.
The Benefit is payable at the end of the agreement. Let’s take an example – I am borrowing 100rupee from you and I agree to pay after 3 months as 105 rupees.
Our agreement is for 3 months. And after the end of the agreement, I owe you Rs.105.
When the payment is due to be paid after certain period or at the end of the agreed period it is called as Endowment plan.
what is endowment plan in Life Insurance?
Like the above example, if an insurance plan gives you maturity value at the end of specific period of 5 or 10 or any number of years, it is certainly an Endowment plan. Normally this kind of plan provides benefit either at end of policy period or at the death of the Insured person or at both events.
Example of an Endowment Plan:
Mr. Arun Buys an endowment plan from X company. He agrees to pay premium for 20 years and the total policy period is 20 years.
He will get the maturity amount at the end of the period. i.e., After 20 years.
If he dies before 20 years, the benefit amount will be paid to his nominee.
I had just explained the policy in a simple manner; hence I had not given any other extra benefits like riders, bonus, etc.
Since this post is intended to explain about what is Endowment plan, I am restricting myself to give only outline of few other topics.
|PRO TIP 1: With advancement in technology and change in the consumer behaviors, the insurance companies had designed many innovative endowment plans. We will try to cover these plans from top companies in the coming days. There are endowment plans where we get money back in-between, few companies had launched with many flexible withdrawal benefits also.
Types of endowment plans:
This Endowment plan can be categorized into 3 major types as below.
Types of endowment plans
PARTICIPATING ENDOWMENT PLANS
NON-PARTICIPATING ENDOWMENT PLANS
We will see the detailed explanation of each type in individual topics.
|PRO TIP 2: Almost all the Insurance companies in India offer Endowment plans. The IRR of these plans are in the band of 3.5% to 6.5%. In few plans the IRR is even lesser than 3.5%. Very rare cases we were able to find any product above 6.5%. So, if someone tries to sell you by saying that the returns are 8% or even more than that, be cautious and you are about to be wrongly sold.
Advantages of Endowment Plan:
- Guaranteed Maturity value
- Regular Bonus declaration by the insurance companies
- Insurance coverage inbuilt
- Option to decide plan tenure
- Tax benefits.
Disadvantages of Endowment Plan:
- Longer Term
- Comparatively less returns
- Less liquidity in between
- Higher penalty for preclosure of policy
- Less Transparency.
|PRO TIP 3: Endowment plans also provide life insurance coverage Inbuilt. So, while calculating the actual returns, you need to consider the cost of insurance and the tax impact also.
What is participating Endowment plan?
we had learned about Endowment plans and we know how an endowment plan works. Now we are going to know about Participating endowment Plan.
participating endowment plan maturity
In this kind of plan the returns will be based on a fixed sum assured and bonus declaration year on year.
Let’s see it with an example:
Assuming Mr. Arun buys a participating endowment plan from LIC. He cannot choose the premium directly, instead he chooses the required Amount of Sum assured and the premium is derived from the Sum assured.
He buys a Sum assured of 1 lac for a premium of 5000 rupees for 15 years.
The Maturity Amount of this plan depends on the sum assured and the bonus declared every year. Let’s assume the bonus is Rs.30 per 1000 sum assured. Total bonus per year is Rs3000 per year. Total 15 years bonus will be Rs.45000.
So, Mr. Arun will get Rs. 145000 as maturity (Sum assured plus + Total bonus for 15 years).
The bonus rate is decided every year and it may vary year to year and company to company. Bonuses are fully depending on the Insurance company’s performance.
Few companies declare final one-time bonus called as Terminal bonus at the end of policy maturity along with the final settlement amount.
What is Non-participating Endowment plan?
This is a new common in the Indian Insurance industry. All the companies are very keen in launching new non participating endowment plans. This plan is like a plain white vanilla ice cream. The Maturity amount in these plans is decided at the inception itself.
In the same example of Mr. Arun buys a Sum assured of 1 lac for a premium of 5000 rupees for 15 years.
He will get a maturity of Rs.140000 and it is declared in advance by the insurance company. There is no worry about the bonus declaration by the company.
Normally the maturity value is written exactly in the policy document and these plans doesn’t give either a higher return than the guaranteed amount nor a lesser amount than given in the policy document.
|PRO TIP 4: In both the Participating endowment plan and Non participating Endowment plans, 65% of the money collected from the policyholder is invested in government securities and is highly monitored by IRDA.
What is ULIP plan?
The Term ULIP is a short form for Unit linked insurance plan. This is one kind of Insurance plan where you can expect a higher rate of returns or interest. The money collected is invested in share market according to the decision made by the policy holder.
Normally the investment risk taken in this policy is borne by the policy holder. We can decide on various different funds and decide according to its risk exposure.
FOR FURTHER DETAILS https://www.irdai.gov.in/