5 Things You Must Know About Endowment Insurance

Until recently, endowment insurance plans were the most popular form of life insurance. With private companies now offering insurance, unit linked plans (ULIPs) have gradually become popular with customers.

ULIPs account for about 90% of new insurance policies sold by private insurers. However, the endowment policy is still a major part of the insurance policies sold by the Life Insurance Corporation of India. If you are thinking of buying one, then you should understand a few things about the endowment policy:

  1. An endowment policy is a combination of insurance and investment. In this, the life of the policyholder is insured for a certain amount. This life cover is known as the Sum Insured.

A portion of the premium is allocated towards this sum insured while some is allocated for administrative expenses of the insurance company selling the policy. The remaining amount is invested.

  1. The amount invested generates a fixed return annually. Therefore an endowment policy includes an annual bonus. The bonus is usually generated as a fixed proportion of the sum assured or life cover.

  1. The bonus declared after that is not immediately payable. In the case of a stock dividend or mutual fund dividend, which is payable after the declaration, the bonus is payable when the policy matures or the policyholder dies.

  1. Bonus in endowment policy is only credited and not compounded. Let us take up the case of a 35-year-old man who was paying Rs. Takes a policy with an amount of Rs. 10 lakhs with a term of 20 years. The premium for this is around Rs. 49,000 per year. At the end of the first year, the insurance company declares a bonus of Rs. 50 per thousand of Sum Insured or 5% of Sum Insured. This amount is Rs. 50,000, which is Rs. 50,000 for the next nineteen years by the end of the policy. The same goes for the declared bonus for the remaining term of the policy.

  1. The insurance company announcing an average bonus of more than 5% over a period of twenty years is very unlikely. This is mainly because settlement policies primarily invest in government securities. Also taking into account the administrative expenses of insurance companies, a large bonus is highly unlikely.

If an endowment plan works for you:

  • Want to reap the dual benefits of investment and insurance.

  • You want to get a lump sum at the end of a few years of the policy’s maturity and you are looking for a long-term investment.

  • Want to pay your premium in the short term and benefit from the plan in the policy term.