Endowment insurance policy, in general is a conventional policy, that provides life-cover for a certain amount referred to as sum assured in the insurance terminology. In addition, the endowment insurance also provides savings in the form of guaranteed returns in due course. Read more on Term plan or an endowment plan; which is better?
The insured person with this policy is provided with a lump-sum amount at certain pre-determined date or in the course of the death of the insured. Some of the policies of this kind also tender the lump-sum amount if the insured suffers from certain critical illness condition.
The term of maturity of such a policy ranges from 10-20 years depending upon the age of the person taking such an insurance policy. Furthermore, this set of insurance policy is available as with-profits or as unit-linked.
Pros of Endowment policy purchase
The endowment policy purchase entitles policyholders to receive a bonus that is provided from the annual profits generated from the investments made by the insurance entity on an yearly basis. And this bonus is usually declared as a % of sum assured. For instance, if a company declares INR 50 for every sum assured value of 1000, then a policyholder with a sum assurance of INR 1 million would be entitled for a benefit amount equivalent to INR 50,000.
Also, in case of need, the policyholder could redeem the benefits of the policy or surrender it and be entitled to the surrender value that is computed basis the amount that has been already tendered and the number of years for which the policy was operational.
The maturity amount or the endowment that is paid for holding the endowment insurance proves to be a vital and integral source for meeting various financial liabilities including child's education, household expenses, child's marriage etc.
In case of death of the insured person, the policy provides the lump sum amount as the death benefit to the nominee of the policy.
Endowment insurance plans also provide for loans against the policy, in which case the benefit amount that would otherwise accrue for holding the policy, would get reduced by outstanding loan amount and interest. Also, a conventional insurance plan is free from any kind of risk such as the interest rate risk or investment risk.
Cons of Endowment Insurance Plan
Though, the conventional endowment insurance plan provides for savings in addition to life-cover, not all of the premium amount is channelized for savings, so if the investors primary objective is to accumulate savings over the years, the same is left unmet with such insurance plan.
Bonus that accrues on account of holding an endowment insurance plan is payable only on the maturity or in event of death of the insured person. To counter this disadvantage, another type of endowment policy referred as money back policy is introduced, wherein the bonus amount is payable after regular intervals.
The bonus that is declared for the endowment insurance policyholders remains the same throughout the term of the policy and is not compounded, which thus results in less returns.
Also, as such an insurance plan conventionally does not invest in market-governed securities, returns generated are usually limited. Further, such returns are not at par or in line with the inflation rate.