The Complete Guide on Endowment Policies for 2025

Posted by  Fintra , updated 2024-10-22

If you’re a newcomer in the world of investments and their various tools, you’ll ponder what exactly are endowment policies. Don't worry Fintra is here to be your intellectual friend who will enlighten you on this topic! 

Basically, an endowment plan is a life insurance contract that has been crafted to pay a lump sum amount upon reaching its maturity or on death. Such plans have a dual purpose, they combine insurance cover and savings plan. The maturities range between ten, fifteen, or twenty years up to a certain age limit. Endowment policies even pay for critical illness if the need arises, and some of them cover the individual for a specified period. Hence, the insured has the option of getting insured till he/she desires to be insured. 

In this blog we'll discuss the following topics:

1. What is an Endowment Policy?
2. Types of Endowment Policies
3. Types of Endowment Policy
4. Features of Endowment Policies
5. Under what circumstances should one buy an Endowment Policy?
6. Why should an Individual buy an Endowment Policy?
7. What to see when buying an Endowment Policy?
8. Claim Process of Endowment Plan
9. What are the documents required for purchasing an endowment plan? 
10. Endowment Policy Vs Term Insurance
11. Endowment Policy Vs ULIPs

What is an Endowment Policy?

Since an endowment policy is similar to a life insurance policy, giving the combined benefit of both, insurance coverage and savings, their plans assist the insured to save regularly over a particular period of time to obtain a lump-sum amount at maturity. In case the insured survives the entire tenure of the policy, the maturity amount is paid. However, unfortunately, if the insured is demised during the policy tenure, the sum assured amount as death benefit along with a bonus (if any) will be paid to the beneficiary of the policy. Finally, another positive aspect of an endowment policy is that it even helps to form a financial cushion for your future so that you can meet the long-term and short-term financial objectives of your life.

According to Fintra's financial experts, if you have a regular source of income and require a lump sum amount after a certain time then you may consider opting for an endowment policy. In general, small business owners, salaried employees, and professionals such as lawyers and doctors should seek endowment policies to meet their long-term financial requirements.

Types of Endowment Policy

The various types of endowment policies are as follows:

1. Unit Linked Endowment Plan- This fixed-term saving plan provides life coverage, and the premiums paid by the insured are bifurcated into various units held under a particular investment fund as selected by the insured person. The returns on investment are entirely dependent on the fund's market performance. This plan is suitable for those who have a high-risk appetite and desire to gain higher returns on investment.
2. Full/With Profit Endowment- In this type of plan, the insured person receives the basic sum assured amount that's equal to the death benefit. Right from the start of the policy, this amount is guaranteed, and the final payout that is paid to the insured is comparatively higher. This is so because it includes the total sum assured amount plus an additional bonus.
3. Low-Cost Endowment- These types of endowment plans are invented to assist the insured to accumulate a fund for the future, which is to be paid after a particular time. Generally, these low-cost endowment plans are used for making repayments of mortgages, loans, etc. If the insured demises during the policy term, the target amount will be paid as a minimum sum assured to the beneficiary of the policy.
4. Non-profit Endowment- In a non-profit traditional endowment policy, the sum assured amount gets paid to the policyholder as a maturity benefit or to the policy's beneficiary as a death benefit.
5. Guaranteed Policy- Endowment insurance policies guarantee a sum of money will be provided to the individual or its beneficiaries whether the individual lives until the insurance policy matures or it dies early. The endowment policy's face value will be provided to the policyholder on the "maturity date" or to the life insurance policy's beneficiary when the insured passes away. Since the bonuses under the policy are not guaranteed, hence, with endowment policy one gets a dual advantage of guaranteed policy benefits along with non-guaranteed bonuses.

Features of Endowment Policies

The following are the salient features of the endowment policy: 

• Death and Survival benefits: The nominee and/or the beneficiary receives the sum assured along with bonuses if the insured demises before the maturity of the policy. Moreover, the insured is entitled to receive the sum assured if it outlives the policy.
• Higher returns: An endowment plan provides financial protection to the policyholder's family and dependents in case of the unforeseen demise of the insured and helps build a corpus for the future. Be it survival benefit or death benefit, an endowment plan's payout may be much higher than a pure life insurance policy.
• Premium Payment Frequency: Policyholders are allowed to make regular, single, or limited payments of the premium based on the policy taken by them. They can also wish to pay on a yearly, half-yearly, quarterly, or monthly basis.
• Flexibility in Cover: Policyholders have the option to add riders, such as total disability, critical illness, and accidental death, to their plan and enhance their life cover. In case of permanent disability or critical illness, some plans also provide premium payment waivers.
• Tax Benefits: The policyholder obtains tax exemption on the premium payments as well as on the maturity or final death payouts under Section 80C and Section 10(10D).
• Low Risk: Endowment policies are known to be safer when compared to other investment plans such as mutual funds or ULIPs because the amount isn't invested directly in the stock market or equity funds.

Under what circumstances should one buy an Endowment Policy?

As a part of the portfolio, everyone desires risk-free and guaranteed returns on their investments. Therefore, endowment plans are suitable options for individuals who desire to protect their family and dependents financially and build a corpus for fulfilling their investment objectives for a longer period. However, do bear in mind that such regular premium plans should only be purchased if the insured has a steady flow of earnings as it will aid him/her in paying the premiums regularly. These plans possess long-term nature, hence, the longer the term of the policy, the total benefit will be better. Hence, those who have an irregular income might opt for single pay or Flexi pay plans, instead of the regular payment endowment plans. 

Why should an Individual buy an Endowment Policy?  

An individual should buy endowment policies because they provide a disciplined habit of saving money for future requirements. An additional advantage of opting for such a policy is that it offers life risk coverage that helps the policyholder's family and other dependents in troublesome times such as when the policyholder passes away. Although it may appear the returns are lesser, the positive fact is that they are risk-free in case of a certain sum assured. You can also receive tax benefits subject to some conditions. For this reason, risk-averse investors prefer purchasing endowment plans. Apart from providing a life cover to the insured in an unforeseen event, these policies also give the maturity amount to the policyholder if it survives the policy term. 

What to see when buying an Endowment Policy?  

When purchasing endowment plans you should consider the following factors:

Begin early planning: It's advised to begin making investments at an early age because it provides a long horizon to invest. Over time this will assist the insured to build a large corpus. Facilitating a disciplined saving habit, it also ensures better returns due to its power of compounding.  

Review the flexibility options: There are several flexible options. Thus, if the insured is a salaried individual, it can opt for a regular payment endowment policy. Besides this, for individuals who have irregular income, there are other options such as single payment. 

Know the different types of Endowment Policies: When the individual desires to invest in endowment plans, it is essential to make premium payments frequently. A certain portion of the premium gets used to purchase a life insurance plan, and the remaining amount is invested on a non-profit basis or profit basis type of plan. 

Select the plan offering riders: Various insurance companies offer some additional benefits such as double endowment policy, education endowment, or a marriage endowment policy. Always remember to keep such riders in mind while purchasing one for them. At times insurers will also provide additional riders for critical illness or surgical assistance.  

Bonuses:  As per the performance of the company, the insurance company will provide bonuses. At the end of every policy year, an insurance provider, who is making profits from its investments, will distribute a part of the profit.  

Non-Guaranteed and Guaranteed Returns: Apart from providing low-risk insurance policies, dual benefits of savings, and death cover, various endowment plans also provide a combination of non-guaranteed and guaranteed returns. 

Claim Process of Endowment Plan

Soon after the death of the policyholder, the beneficiary must inform the insurer about the unfortunate event because the sooner the insurer gets to know about the loss, the claim form will be sent to the nominee.

The claim form must be signed by the beneficiary or nominee of the policyholder/assignee or by the legal heirs for receiving the death benefit. The loss statement is also required by the last treating doctor who had checked the insured, and the certificate must be issued by the authorities of the hospital where the insured was treated. Besides this, even a statement by a witness and death certificate, who was presented at the time of cremation, is also required to be submitted. To make the process effective and to get a quick sanction of the death benefit, you can provide an additional form as mentioned below: 

1. A certified copy of Post Mortem, investigation report by the police, and First Information Report if the death of the policyholder was unnatural.
2. Employer’s e-certificate (if the insured was serving in an organization).

What are the documents required for purchasing an endowment plan? 

Following is the list of documents required when applying an endowment plan: 

1. Proof of age
2. Proof of residency
3. Duly filled and signed application form 
4. Photograph
5. Medical report (if required)

Endowment Policy Vs Term Insurance

Endowment Policy Vs ULIPs

Conclusion

As we have described above, an endowment plan is like a life insurance contract crafted to pay a lump-sum amount after it reaches the maturity period or on the death of the insured person. Fintra experts advise that individuals who have a regular stream of earnings and are desiring a lump sum after a certain period of time can consider acquiring endowment plans.

Endowment plans act as a disciplined route for individuals to build a corpus, that can later assist the dependents of the insured if any financial contingencies occur. Salaried individuals, small businesspersons, and professionals such as lawyers and doctors should purchase endowment plans to meet their long-term financial goals. Moreover, these plans are ideal options for those who do not mind obtaining fewer returns and are risk-averse. Alternatively, endowment policies are observed to be for the common mass rather than for those individuals belonging to the super-rich class. However, if you are interested in availing only life cover and not the saving component, then it's suggested to go for a term life insurance policy. Term plans are affordable and they provide higher cover at a lower premium than the endowment policies.