Ch. 13: Things to keep in mind before buying Endowment Plans

An Endowment Plan is an investment coupled with an insurance policy. It offers you the best of both worlds. It helps secure your family’s financial future as well as save for your long-term goals. Goals such as saving for retirement, children’s education, purchasing a house or a vehicle, children’s wedding, and so on. It is one of the most robust financial strategies for providing your family with a financial cushion against future uncertainties while also achieving your goals.

In the previous article, we talked about how an Endowment Policy works. In this one, let’s take a look at some important things you must keep in mind, before you invest in an Endowment Plan.

Let’s dive right in!

Determine the goal of your investment

Before investing in an Endowment Plan, you should assess your financial needs and goals, particularly your long-term objectives. You can consider buying an Endowment Plan if you think you’ll need a set amount after a specific time period for, say, your retirement, or your child's education or marriage, etc.

The maturity benefit payable under an Endowment Plan can either be -

• The sum assured you choose while buying the policy.
• The total premiums you pay during the premium payment period.
• A percentage of the total premiums you pay during the premium payment period.

While calculating the maturity amount, keep in mind your goal/ reason for investing in the Endowment Plan. The amount you choose should be sufficient to achieve the goal for which you purchase the Endowment Plan. For instance, say you think you’ll require Rs. 2 Crores for your son’s higher education. So, you can buy an Endowment Plan with a cover amount of Rs. 2 Crores.

You can choose the policy duration of the Endowment Plan based on your financial needs and goals. The insurance company will pay the maturity benefit only after the policy duration is completed. So, make sure you choose a policy duration that corresponds to the goal you're saving towards.

For instance, if you are saving up for your kid’s wedding that may happen 20 years from now, you can select the term of 20 years for your Endowment Policy. Or if you are saving up to buy a new home in about 10 to 15 years, you can buy the plan with a duration of 10 or 15 years.

You should be aware that an Endowment Policy is a long-term commitment. The money you invest in Endowment Plans will be locked in for a long and fixed period of time.

In case you pass away in the middle of term, the death benefit will be paid to your nominee. The maturity amount, however, will be paid only after the policy term gets over. In case any withdrawal is made in the middle of the term, it may result in huge losses to the funds accumulated in your policy.

The premium rates of an Endowment Policy can be pretty expensive. Hence, it becomes all the more important to take the cost factor into account. You should buy a policy whose premiums you can afford in the long run.

You should also make sure that you have a stable income so that you’re able to pay the policy premiums on time. If you don’t, your policy may lapse or get converted to a reduced paid-up policy. It can be a considerable loss to you in either case.

Generally, there are three types of premium payment terms available with an Endowment Plan. They are -

• Single Pay: With this option, you can pay the entire premium amount in one instalment. And, enjoy a worry-free cover until the end of the policy duration.
• Regular Pay: Here, you’ll have to pay the Endowment Plan premiums until the very end of the term.
• Limited Pay: Under this option, you are required to pay the premiums for a limited number of years. You can finish paying off all your premiums in faster and bigger instalments. And, you can enjoy the cover for the remaining duration.

Let’s understand the above 3 options better with Samar’s example. Samar, a 30-year-old, buys an Endowment Plan for a duration of 50 years. Let’s see how he’ll have to pay the premiums under all the 3 options.

• If he chooses Single Pay, he’ll have to pay the entire policy premium at the time of policy purchase. He won’t have to make any premium payments later.
• If he chooses Regular Pay, he’ll have to continue paying the premiums as long as his policy is in force, i.e., for 50 years.
• If he chooses Limited Pay,he can finish paying off all his premiums early in life, say, in the next 10 to 15 years.

Besides the premium payment term, you can also customise the premium payment frequency, i.e., how frequently you want to pay your premiums. Based on your convenience, you can choose from among 4 options -

• Annual Option
• Semi-annual Option
• Quarterly Option
• Monthly Option

If you think you won’t be able to pay large amounts every year, you can choose to pay your premiums semi-annually, quarterly or monthly. In case you think you can afford paying large amounts, you can select the annual premium payment option.

Important - Remember to set up auto-debit or standing instructions on your bank account - irrespective of the premium payment frequency you choose. This will ensure that your premiums are paid on time and reduce the risk of your policy lapsing because of the non-payment of premium.

Before you invest in anything, it's critical to know what kind of returns you'll get. Similarly, when investing in an Endowment Plan, you should know how much money you'll earn back. For this, you can ask the insurer or your financial advisor to share the IRR for the investment you are making.

The IRR is a financial metric that compares the returns from two separate cash flow sources, i.e., cash inflows and cash outflows. The metric essentially calculates and tells you about the profitability of your investment. Generally, the higher your investment's IRR, the better.

Go ahead only if you are satisfied with the returns and think it will be sufficient to cover the goal for which you're purchasing the Endowment Plan.

Guaranteed benefits include the sum assured and accrued bonus you’ll surely receive. Non-guaranteed benefits, on the other hand, are variable benefits. Whether you receive these benefits or not will depend on several factors, like the insurance company's future performance, economic conditions, etc.

The guaranteed and non-guaranteed benefits you’ll receive under an Endowment Plan will be mentioned in the ‘benefit illustration’. You can get this benefit illustration from your financial advisor or the insurer. After you get this benefit illustration, go through it and check the guaranteed and non-guaranteed benefits the insurer will pay. Purchase the policy only if you think the benefits will be adequate for you and your family in the future.

You may want to discontinue or surrender your Endowment Policy for multiple reasons, like -

• You are not able to pay the premiums because of financial problems.
• You are not satisfied with the plan you purchased and want to invest in another Endowment Plan where you’re getting better returns.
• Your initial purpose of buying the Endowment Policy has changed and you no longer find the need to continue with it.

Now, as important as it is to know how much returns, bonuses, etc. you’ll receive under the policy, it is equally important to understand how much money you’ll lose if you discontinue it. So, ensure you’re aware of the consequences of the discontinuing or surrendering your Endowment Plan.

While it is important to buy a policy with the right features, duration, cover amount, etc., it is also important that you buy it from the right insurer. This will ensure you won’t run pillar to post in case a problem arises while the policy is active or when it matures.

You can find out if an insurance company is good or not, by checking -

• The insurance company’s history of claim settlement.
• The returns and bonuses provided to existing policyholders.
• The reviews of previous customers. Going through the reviews will help you understand and get a better picture of how good or bad the insurer’s services are.

By paying a certain extra cost, you can opt for add-ons or additional benefits, i.e., riders along with your base Endowment Plan. Riders provide additional coverage under specific circumstances. For instance, in case of accidental death, the Accidental Death Benefit Rider will provide an additional sum of money to your family.

Riders are one of the most convenient customisations available. Why? Because you can pick them without any extra effort. You don’t need to go through any documentation or medical tests besides the ones you already do for your base plan.

Here are some common riders available with an Endowment Policy -

• Critical Illness Rider
• Accidental Death Benefit Rider
• Accidental Disability Rider
• Hospital Care Rider
• Surgical Care Rider
• Waiver of Premium due to Disability Rider
• Waiver of Premium due to Critical Illness Rider

Please note, besides the ones we’ve mentioned above, some insurers may offer other types of riders too. So, ensure you check the policy wordings and brochures before going ahead.

Just like the name implies, during the free look period, you can freely look over your policy after you’ve purchased it. During this period, you can go through the policy document and check the features, limitations, exclusions, etc. In case you are not satisfied or feel the policy doesn’t fit your or your family’s needs, you can return it. You won’t have to pay any penalty or cancellation charges if the policy is returned during the free look period.

The length and terms and conditions of the free look period offered under an Endowment Plan may vary across insurers. So, ensure you check them before going ahead and making the purchase.

The grace period and revival period come into play if you fail to pay your premiums within the due date.
Grace Period
The grace period is the additional time period offered by insurers to make the premium payment. During this period, you can pay the missed premium instalment without losing your insurance cover.

In case you fail to pay the premiums within the grace period, your policy will lapse. And, all benefits under your Endowment Plan will cease.

Revival Period
The revival period comes into the picture after the grace period is completed. During this period, you can get your lapsed policy back.

The conditions for both the grace and revival period will differ from insurer to insurer. So, before you go ahead, understand the grace and policy revival period of the policy you’re going to buy.

When you buy an Endowment Plan, you'll also need to choose a nominee (or multiple nominees). You can appoint any member of your family as your nominee - your spouse, children, parents, siblings, etc. The chosen nominee will be the ultimate recipient of the claim amount - if you pass away during the policy tenure.

In order to ensure there is no difficulty during or after you make the purchase, you must thoroughly research and compare the Endowment plans across various insurers. Compare the benefits, features, limitations of the plans as well as the returns, bonuses, and past performance of the insurance companies. And then, accordingly, finalise a policy that perfectly meets your and your family’s requirements.

Last but not least, connect with a good financial advisor. An endowment plan is an investment cum insurance plan that acts like a saving scheme. It is a long-term commitment. So, to ensure you don't go wrong, you can speak with a good financial advisor. They will assist you in finding the right policy for you and your family. They will answer any queries you may have regarding the Endowment Plan you’re considering buying. They will also provide end-to-end support, and help you make informed decisions.

So, these are some of the things you must keep in mind when buying an Endowment Plan. The things we’ve mentioned above might seem of little importance now. But they will ensure you or your family don’t face any hassles later on - after you’ve bought the Endowment Policy.