An endowment policy is like a savings plan with life cover.
It provides a risk-free and guaranteed return on maturity as long as you make the payments agreed at the inception of the policy.
It helps you save for your future so that you can get a lump sum on maturity or on death before maturity.
In other words, an endowment policy is a combination of Term life insurance and an Investment.
The life cover of an Endowment policy is known as Sum Assured.
How does it work?
After paying-out, the cost of insurance, administrative and distribution costs, the life insurance company invests the balance of the premiums to generate income.
The surplus of the income over the expenditure of the insurance company is redistributed to all plan holders as a bonus.
This bonus is usually declared as a specific proportion of sum assured or life cover.
The bonus declared is not paid to the endowment policyholder immediately as in case of dividends.
It is added to Sum assured each year, and is payable on Maturity of the plan or on the death of insured.
The process of allocating the bonus to the policy of the insured is called vesting.
The bonus so added to the sum assured at the end of every year is called Vested Bonus.
While the bonus is vested every year, it does not compound like a fixed deposit. Each year it accumulates as in case of simple interest.
The following example shows the effect of bonus on the sum assured on a 5-year endowment policy.
|Years||Sum Assured||Vested Bonus||Total|
Like all insurance plans, the Endowment policies also have some limitations.
1. Higher Premiums in comparison to other policies
The Premiums on endowment plans are usually higher than Term life or Whole of life insurance plans. This is an expensive approach to life insurance.
2. The surrender value usually is lower than the premium paid
In the event of early surrender, the surrender value of the plan is generally lower than the premiums paid into the plan. Hence it is never a good idea to surrender the plan earlier than maturity. However, most endowment plans have a policy loan facility to address short-term liquidity needs.
3. Returns can be lower than Market Linked Investments
While an endowment plan offers a capital guarantee and stable returns in the form of Bonus, the yield can be comparatively lower than market-linked investments. Such plans are more suitable for investors who do not want to take any risks and are happy with low returns.
However, they may not be ideal for a youngster who can take more risks and are looking to get high returns on their investments.
Arrange a free consultation with me to discuss your investment & protection goals and choose the most suitable Endowment policies/investment plans.