Most plans that are there in the industry are actually Endowment Plans and understanding the basics of Endowment Plans would empower each one of you to understand most of the plans that are there. Like the 3 basic colours Red, Blue and Green and other colours being a combination of these primary ones, there are 4 basic types of Life Insurance Plans in the industry and other plans available are combinations or extensions of these basic ones.
The 4 basic types of Plans available in the Life Insurance Industry are:
1. Term Plans- which cover the pure risk and are the cheapest form of Life Insurance Coverage without any return on Investment
2. Endowment Plans- which cover the risk as well as has savings inbuilt in the plan with a part of the premium being used as Investment with the risk of Investment lying with the Insurance Company
3. ULIP- which also cover risk with Investment as a part of the premium but in this case the risk of Investment lies with the policyholder
4. Annuity- Which provides annuity from the Vesting Date for the lifetime of the annuitant or more, depending upon the option of annuity chosen. This is the plan where annuity starts immediately from the next installment date.
All other types of plans are actually sub sets of the above mentioned plans. For example:
1. Whole Life Plan is actually Term Plans with extended term even though this plan is the one which personifies Insurance as the entire risk of the life insured is transferred for the rest of his life
2. Money Back Plan is actually an Endowment Plan where the Maturity Benefit is not paid in a lumpsum but over a period of time at pre-defined interval
3. Child Plan can be both Endowment and ULIP where the Life Insured can be a child or an adult
4. Deferred Annuity Plan is actually an Endowment + Immediate Annuity plan
5. Combination Plans of Endowment + Whole Life or Term + Endowment, etc. etc.
Now comes the TOUGHEST question: which is the BEST Endowment Plan in India?
Best is a very personal choice. What is best according to me may not be best according to you.
What are Endowment Plans?
An Endowment Plan is actually a Long Term Insurance Plan which provides both cover and returns on investment.
Basically, in an Endowment Plan, the premium needs to be paid for the entire policy tenure. The Premium can be paid:
- In a lump sum, under Single Premium Payment Option
- For a limited period, under Limited Premium Payment Option
- For the entire policy tenure, under Regular Premium Payment Option
The plan provides Coverage for the entire policy tenure, i.e. in case the Life Assured dies anytime during the policy tenure, the Death Benefit is paid to the nominee and the policy terminates.
However, on survival of the Life Insured till the end of the Policy Tenure, the Maturity Benefit is paid to the policyholder and the policy terminates.
How do Endowment Plans work?
The premium paid for an Endowment Plan is divided into 3 parts- Expenses, Mortality and Investment.
The Mortality is the charge for the Life Coverage or Sum Assured that is provided depending upon the age, health, occupation, location, etc. of the Life Insured.
The Expenses for all Endowment Plans are almost standard like Administrative Costs, Commissions paid, etc.
Now, comes the most interesting part. The more amount of the premium is allocated into the Investment, the better returns the plan would provide. However, for Endowment Plans, being Traditional in nature, the risk of investment lies with the insurer and the policyholder is provided a Guaranteed Return at the end of the Policy Tenure as Maturity Benefit.
However, the Maturity Benefit of an Endowment Plan is largely governed by the Bonuses. Maturity Benefit in a Participating Plan is Sum Assured + Bonuses.
To read more about Bonuses, read Bonus in a Life Insurance Policy
Put simply, an endowment plan combines insurance with investment. As an insurance policy, it promises to protect your family financially in the event of your death. As an investment, it offers returns on your savings. The accumulated premiums and bonuses become a large sum by maturity.
The Endowment Plans have been criticized a lot for being expensive insurance tools, but if you invest correctly, you can get some great benefits from the Endowment Plans. Listed below are the usefulness of the Endowment Plans. Read on to see if buying an Endowment Plan would prove to be beneficial to you or not.
Usefulness of Endowment Plans:
1. Long Term Savings – It can surely be argued that Endowment Plans do not provide the best of returns as compared to other pure investment products like Mutual Funds, etc. but it surely helps to create a Long Term Corpus with the savings. In fact it helps in forced savings for many.
2. Cover and investment – Like mentioned above, an Endowment Plan provides a life cover while also investing your money in various securities. As a result, upon death or maturity of the policy, whichever occurs earlier, you get a hefty amount of money in your hand.
3. Tax Benefit – Like most other Insurance Plans, Endowment Plans have a 2 fold Tax Benefit. The premium invested in this plan is tax free till Rs 1 lac per annum under section 80C and the Maturity Benefit is tax free under section 10(10)D since the Sum Assured in a Traditional Endowment Plan is always more than 10 times the premium that is being paid. Hence the new IRDA rules do not affect this.
4. Security for loan – You can use an endowment policy as a security for a loan. Since these plans are long term plans and the money assured is on the higher side, loans are easily available against the Endowment Plans.
5. As a fund – An Endowment Plan is very useful for people who want to save up and then use the money for a particular event in their life. Many people buy Endowment Plans to serve as retirement benefits and receive the sum assured after retirement. Some investors keep it aside for a major life event like a child’s marriage or funding their child’s college admission. An Endowment Plan is excellent if used for such purposes.
The age old question, are the Cheapest Endowment Plans necessarily the best? Well, to understand Endowment Plans, all plans are good as it has been designed by keeping the person’s requirement in mind. For example, the Maturity Benefit can be in a lumpsum or in installments, like Money Back or Anticipated Endowment Plans. It totally depends upon your requirement and investment objective what type of Maturity Benefit you should opt for. Thus, you cannot have a BEST Endowment Plan and all plans are good.
You need to evaluate your needs, requirements, investment objective, etc. and then choose the plan which best suits your needs.