Ch. 1: What is an Endowment Plan?

As we grow in life, for most of us, our responsibilities only multiply. Say, you are newly married, you may have plans of having children in the future, or you may plan for higher education from that top MBA school after a few years of work.

If these sound like pointers from your future plans To-Dos list, and are looking for a safe option to invest, so that you are able to meet these plans with excellent tax benefits, then an endowment plan might just be the right insurance plan for you!

An endowment plan is basically a type of life insurance policy. It is a blend of insurance and investment, which means that it provides you with a life insurance cover and also helps you accumulate a nice savings fund. So

• The death benefit is paid to your nominee if you, unfortunately, pass away during the policy term.
• The maturity benefit is paid to you at the end of the policy term.

An endowment plan is a contract between you and the insurer. While you are required to pay the requisite premiums for a certain time span (called “premium payment term”) to keep the policy active, the insurance company gives you assured benefits in the form of maturity benefits and a life cover.

Maturity Benefit

If you survive your endowment policy’s term, you receive a maturity benefit which is called sum assured. In other words, this is a guaranteed sum that you receive at the end of the policy. It will be paid to you as a lump sum. And, if you have opted for a Participating plan, you are eligible to receive any bonuses accrue under the policy as a part of the maturity benefit.
The sum assured on maturity, depending on the product you choose, may be

A predefined fixed amount
When purchasing the policy, based on your goals you can choose a fixed amount as the sum assured.

The Premiums you paid
In this case, the maturity benefit will be the sum of premiums you paid to the insurance company.
When purchasing the policy, you can basically pick the premium you can comfortably pay. The sum assured in this case will be either

● The total premiums payable under the policy, excluding any extra premium, rider premium, and taxes.
● A percentage of the total premiums payable, excluding the taxes, rider premiums, underwriting extra premiums, and loadings for modal premiums. The minimum and maximum percentage depends on your age of entry, i.e., the age at which you buy the policy. It can range from 100% to 400%, etc.

For example
Sohail buys a participating endowment policy in 2022 with a policy term of 30 years. Let’s see how the maturity benefit may differ with different products.

Scenario 1: The maturity benefit is equal to the chosen sum assured
Let’s assume that Sohail chose a fixed coverage of Rs 50 Lakhs as sum assured while purchasing the policy. He will be eligible to receive the 50 Lakhs, along with any accrued bonuses, as the maturity benefit.

Scenario 2: The maturity benefit is equal to the total premiums payable over the premium payment term. This will exclude taxes, rider premiums, underwriting extra premiums, and loadings for modal premiums.
Let’s assume that Sohail can pay an annual premium of Rs 1.5 Lakhs for the next 25 years. This premium excludes any extra premiums, rider premiums, underwriting extra premiums, loadings for modal premiums, etc.

So, the maturity amount = Premium payable per year x Premium Payment Term
= 1,50,000 x 25
= Rs 37,50,000

So, he will be eligible to receive a sum assured or maturity benefit of Rs 37.5 Lakhs along with any accrued bonuses.

Scenario 3: The maturity benefit is equal to a percentage of the total premiums payable over the premium payment term. This will exclude taxes, rider premiums, underwriting extra premiums, and loadings for modal premiums.
Let’s assume that Rohan is 30 years old when he buys the policy and the percentage specified for this age of entry is 150% of the total premiums paid.

So, the maturity amount = 150% of Total Premiums Paid
= 150% x [Premium x Premium Payment Term]
= 150% x [1,50,000 x 25]
= 150% x 37,50,000
= Rs 56,25,000

So, he will be eligible to receive a maturity benefit of Rs 56,25,000 along with any accrued bonuses.

Death Benefit

The second benefit Endowment Plans offer is a Death Benefit. Your nominee is eligible to receive the death benefit if you unfortunately pass away during the policy term so they can continue living a comfortable life without having to worry about expenses - both big and small. The policy will terminate once the death benefit is paid.

The sum assured on death can be
● The sum assured chosen at the time of purchasing the policy.
● A multiple of the annual premium chosen at the time of purchasing the policy.

Let’s have a look at Sohail’s example again and assume that he passes away in the 10th policy year. Here’s how the death benefit will differ with different products -

Scenario 1: The death benefit is the sum assured chosen while purchasing the policy
Since Sohail has opted for a Participating Policy, his nominee shall receive Rs 50 Lakhs along with any accrued bonuses as the death benefit.

Scenario 2: The death benefit is a multiple of the annual premium chosen while purchasing the policy
As discussed above, the annual premium he pays is Rs 1.5 Lakhs. Assuming that the sum assured multiple of his policy is 10,

Sum assured = Sum assured multiple x annual premium
= 1,50,000 x 10
= 15,00,000

His nominee shall receive Rs 15 Lakhs along with any accrued bonuses.

Depending on the product, the nominee can choose the death benefit to be paid out as
● A lump sum.
● Staggered payments. The percentage, tenure, and frequency depends on the product. For instance, 20% of the cover amount can be paid annually over a span of 5 years.

This can work in both ways, depending on the product. Some products may make the death benefit payout in the form of a lump sum and give your nominee an option to receive it in staggered instalments. On the other hand, some products may make the payout in the form of staggered instalments, and give your nominee an option to receive them as a lump sum.

Please note that this choice may not be available with each product.
Let’s have a look at Sohail’s example again. As mentioned earlier, his nominee is eligible to receive Rs 50 Lakhs as the death benefit and can choose to receive it as a lump sum or staggered payments. Let’s see how.
We have assumed that Sohail passes away in the 10th policy year, i.e., in 2031.

Scenario 1: Death Benefit as a Lump Sum In this case, his nominee shall receive Rs 50 lakhs, along with any accrued bonuses, as a lump sum in 2031.

Scenario 1: Death Benefit as Staggered Instalments
Let’s assume that his nominee chooses to receive 20% of the death benefit annually over a span of 5 years.
So,
Annual death benefit payout = 20% of 50,00,000
= 10,00,000

Hence, they will receive Rs 10 lakhs on an annual basis from 2031 to 2035.

The Endowment Plan may also have other features like loyalty additions, guaranteed additions, bonuses, joint life option, etc. This depends on the product you choose.

Loyalty Additions

Some insurers may give you loyalty additions to acknowledge the fact that you have paid all your due premium on time. Loyalty additions under endowment plans accrue as a percentage of the total premiums paid at the end of each policy year, after the premium payment term is over till maturity. The loyalty additions are paid as a lump sum when the policy matures.

For instance, Arun buys an endowment plan with a sum assured of Rs 40 Lakhs in 2022, for a policy term of 35 years.. He is required to pay an annual premium of Rs 1 Lakhs for 30 years, i.e., till 2051. He will receive the maturity benefit in 2056.

He pays all his premiums on time till 2051. The loyalty additions begin accruing in 2051 and let’s assume that they are 10% of the total premiums paid.

Total Premiums paid = 1,00,000 x 30
= 30 Lakhs

Annual loyalty additions from 2051 = 10% of 30 Lakhs
= 3 Lakhs

These will accrue on an annual basis from 2051 to 2056. So, Arun will be eligible to receive Rs 15 Lakhs as the loyalty additions when the policy matures in 2056.

Guaranteed Additions

If you pay all your due premiums on time, the insurer may also give you guaranteed additions. They are calculated at a rate of per thousand of the cover amount. It is paid as a lump sum at maturity or death, whichever happens earlier.

Generally, this amount gets added to your policy at the end of each year. This may happen for a specific number of years or till maturity, depending on the product you choose.

For instance, Payal buys an endowment plan with a sum assured of Rs 30 Lakhs. Guaranteed additions of Rs 40 per Rs 1000 of the sum assured will be added to her policy at the end of each year for the first 5 policy years.

So, guaranteed additions she will receiver per year = 40 x [30,00,000 ÷ 1000]
= 40 x [3000]
= Rs 1,20,000

They accrue for 5 years. Therefore the total guaranteed additions she will receive with the maturity benefit or her nominee will receive with the death benefit, is Rs 6 Lakhs (1,20,000 x 5).

Bonuses

Participating endowment plans offer variable bonuses along with the maturity or death benefit. This bonus is linked to the profits the insurance company makes by investing in bonds, securities, debt and equity instruments.
Please note that non-participating endowment plans do not offer bonuses, they only give out guaranteed returns.

For instance, Kiran bought a Participating Endowment Plan and Leela bought a Non-Participating Endowment Plan with a sum assured of Rs 30 Lakhs for a period of 30 years. Kiran’s policy has accrued a bonus of Rs 34,000 over the policy term.

So, Kiran or her nominee will receive a cover amount of Rs 30 Lakhs along with the accrued bonus of Rs 34,000 as the maturity benefit or death benefit. On the other hand, Leela or her nominee will receive Rs 30 Lakhs as the maturity benefit or death benefit. She will not receive any bonuses.

Joint Life Option

The joint life option can be chosen at the time of policy purchase. Under this option, two lives - you (the primary life insured) and your spouse (the secondary life insured) are covered under the same policy. Both of you jointly own the policy as well. The sum assured applicable for your spouse shall be equal to 20% of the sum assured applicable to you.

Aisha buys a Participating Endowment Plan in 2022 with a 30-year policy term and chooses a sum assured of Rs 30 Lakhs. The annual premium comes out as Rs 1,00,000 - to be paid across a premium payment term of 20 years. Her daughter is the appointed nominee. The policy states that Aisha or her daughter will receive the sum assured as the maturity or death benefit respectively, whichever happens first.

There are no loyalty additions or guaranteed additions to her policy. And, she did not opt for the joint life option.

Let’s see how the benefits work

Maturity Benefit
Let’s assume that the maturity benefit is the sum assured along with any bonuses. Aisha will receive it once the policy term is over. So, Aisha is entitled to receive Rs 30 Lakhs as the maturity benefit in 2051 along with the accrued bonuses.

Death Benefit
If Aisha passes away in the 15th policy year, her daughter is eligible to receive the death benefit immediately. This is the sum assured along with accrued bonuses. Therefore, her daughter will receive a death benefit of Rs 30 Lakhs along with the accrued bonuses, in 2036. The policy will terminate after this.

We hope this article helped you understand what an endowment plan is and the benefits associated with it. An endowment plan may be the right fit for you if you plan to make heavy investments in the future and want to save up funds for the same. It is also beneficial for your family as it provides you with insurance coverage, thereby, making their lives hassle-free - even in your absence. We’ll deep dive into why you should consider investing in an endowment plan - in the next chapter!