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About Endowment Plans

    An Endowment policy is a combination of insurance and investment.  Endowment plans are the most popular saving plans in which sum assured is payable either on death during the term or at the end of the term (i.e., maturity). Typical maturities are ten, fifteen or twenty years up to a certain age limit.. The compounding bonus is declared every year and is added to sum assured. Bonus depends upon profitability of insurance company.

    Endowment plan is a combination of term plan and saving plan. The life of the individual taking the policy is insured for a certain amount. This life cover is referred to as the sum assured.  An endowment policy may declare a bonus every year. The money that is invested generates a certain return every year. This return may be declared as a bonus. The bonus is typically generated as a certain proportion of sum assured or life cover as it is popularly known. These plans are also available with limited premium payment term where by you can reduce your premium paying term. In endowment plans, in the event of death of the insured during the term of the policy, the nominee receives the sum assured plus the bonus/participating profit/guaranteed additions, if any. The bonus or profit is paid for the number of years that the insured survives in the policy term.

    Endowment policy is good for young people as it provides them an opportunity not only to cover themselves for risk but also provides financial independence to them in old age by way of maturity benefit.

    While term plans cover just the risk of death, endowment plans also offer some return on the premiums paid by you. So, if you die during the policy term, your nominee gets the sum assured plus some returns; if you survive the policy term, you still get back the sum assured and returns.

    How they work You pay premiums for a predefined tenure and sum assured. The premium will depend on your age, the sum assured, the plan tenure and the nature of returns. A portion of the premium paid by you is invested by the insurer on your behalf. Another portion goes towards your cover and a third towards meeting the insurer’s administrative expenses.

    Various types There are two types of endowment plans, with the differences arising from whether they offer the policyholder a share in the insurer’s profits or not. The first is the ‘Without-Profit Plan’. These endowment plans don’t offer you a share in the insurer’s profits. Therefore, compared to with-profits plans, they are available for a lower premium. They are structured in such a way that if you outlive the policy term, you get back the sum assured and a return on investment termed as loyalty additions. This is basically a one-time payout, expressed as a percentage of the sum assured, made to you for staying in the plan through its term.
    The other is the ‘With-Profit Plans’. Such endowment plans offer relatively higher returns than without-profit plans by sharing with you the profits earned by your insurer from year to year. Depending on whether the return carries assurances, there are two kinds of with-profit variants. There’s an assured returns variant, wherein how much you will get as returns is known at the outset. The returns accrue to you in the form of whatis called guaranteed additions, which is declared either as a certain amount per Rs 1000/- sum assured or as a percentage of the sum assured. For example, Rs 40/- for every Rs 1000/- sum assured. This guaranteed addition component keeps accumulating through the policy term and is paid to you on maturity along with the sum assured. If you die during the policy term, your nominee will get the sum assured along with the guaranteed additions accumulated till the date of death. In non-assured returns plans, instead of guaranteed additions, the returns are paid out as bonuses, which are based on the insurer’s profits. Bonuses, like guaranteed additions, are declared per Rs 1000/- sum assured or a percentage figure of the sum assured.

    What are bonuses?  Bonuses are to policies what dividends are to shares: they are declared from out of the profits that the insurer makes each year, and may vary from year to year, and even be skipped in a bad year. The bonus keeps accumulating, and is usually distributed to you on maturity (some insurers let you encash it periodically, too), along with the sum assured and loyalty additions (at the discretion of the insurer). If you die during the plan tenure, you nominee will get the sum assured along with the bonus accumulated till the date of death.

Premium paid in that financial year towards all life insurance come  with Tax rebate under Sec 80C and in case of Health insurance under sec 80D.


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