- Endowment plans provide you long term savings along with life insurance cover
- They offer dual benefit of life cover and guaranteed returns
- Premiums paid towards this policy and the pay-outs received are exempt from taxes
Of the many classes of insurance policies that are available, endowment plans have probably been the most popular over the years. These are policies that add a savings-cum-investment orientation to the life insurance cover. In these policies, you get a guaranteed amount called Sum Assured plus non-guaranteed amount in form of bonuses either during the tenure of the insurance contract, or on its maturity. It is easy to account for the popularity of endowment plans because of the aspect of getting money during the policy tenure or on maturity. At the same time, the policy promises the life insurance cover amount to the nominee in the event of unfortunate demise of the policyholder.
With these plans, you get “money if you live, money if you don’t”; which works well for a lot of people. There are several variants of endowment plans, but in operational details they are all fairly similar. You pay a premium for a predefined tenure and chosen sum assured. The premium will depend on your age, the sum assured, the type and tenure of plan, and nature of the pay outs.
A portion of your premium goes towards your risk cover, and another portion is invested on your behalf in permissible instruments. Most of these plans offer bonuses on maturity as well. On most endowment plans, the pay-outs (which is the sum assured plus accumulated bonuses or guaranteed additions) accrue to you once you survive the policy. On money back variants of endowment plans, a portion of the maturity benefits are paid out periodically during the policy tenure.
For example, a 30 year old pays INR 50,000 for 16 years in Exide Life My Money Back Plan* and gets INR 5.89 Lacs as Guaranteed Sum Assured. This Sum Assured is paid to him in 4 equal instalments of INR 1.47 Lacs every 5th year. In addition, accrued bonuses are paid as a maturity benefit: INR 5.30 Lacs @8% p.a./ INR 2.83 Lacs @ 4% p.a.
The other reason for the popularity of endowment plans is the tax benefits it offers. You save tax on premiums you pay u/s 80C up to Rs. 1.5 lakh in a financial year. All pay outs are exempted from tax u/s 10(10D) of the Income Tax Act.