Ch. 4: Endowment Plans – Benefits

Expenses are inevitable in life. They may put a dent in your pocket and prevent you from achieving your financial goals that may require substantial funds. That's where endowment plans are handy. Endowment plans are a great option to stay prepared for planned expenses - right from buying a house to your kid’s wedding costs.

An endowment plan is a safety net designed to protect your loved ones in the event of your untimely death, and it also ensures financial protection by raising a corpus for your goals. Technically speaking, it provides insurance coverage and also helps you build a savings fund.

Essentially, you are entitled to receive the sum assured in two ways when you own the policy -

• Maturity benefit - If you survive the policy period, you will receive the maturity benefit.
• Death benefit - In the event that you pass away during the policy term, your nominee will receive the death benefit.

In the previous article, we discussed the significance of an endowment plan. This article throws light on the benefits that are offered by endowment plans.

Guaranteed Lump Sum After A Predetermined Time Span

An important feature of an endowment plan is that it gives you a guaranteed lump sum after a predefined period. This is known as the maturity benefit. It, basically, is the sum assured that you will receive at the end of the policy term. And, you will also be eligible to receive bonuses - if you choose a participating endowment plan.

The maturity benefit may differ from product to product. Here’s how -

• It can be an amount that has been decided by you while purchasing the policy. You will need to figure out an amount that will comfortably cover your financial goals.


• While purchasing a policy, you also have the option to choose the premiums you wish to pay, according to your budget and convenience. In these cases, the sum assured will be -
  
  • The total premiums payable under the policy.
  • A percentage of the total premiums payable. The minimum and maximum percentage depends on the age of entry, i.e., the age at which you buy the policy. It can range from 90% to 180%, 100% to 300%, etc.



Please note that this will not include taxes, rider premiums, extra underwriting premiums, modal premiums.

For example - In 2022, Madhav buys a Participating Endowment Plan for a policy duration of 30 years. He chooses the sum assured to be Rs 40 Lakhs. The annual premium according to the sum assured comes around 1,20,000.

If Madhav survives the policy term, he will receive a maturity benefit of Rs 40 Lakhs along with any accrued bonuses - in 2052.

The death benefit is offered to your nominee in the event of your unexpected demise. With the death benefit, they can continue to lead a peaceful life and accomplish their goals. Once the death benefit has been paid out, the policy will terminate.

The death benefit can be -

• Chosen sum assured
• A multiple of the chosen annual premium.

The death benefit shall be paid out in the following ways depending on the product:

• As a lump sum
  Your nominee will receive the death benefit as a lump sum. However, some products may give an option for your nominee to get this lump sum in instalments.


• As payments in instalments
  Your nominee will also have the option to receive the death benefit in staggered instalments, as per their comfort. The percentage, duration, and frequency will depend on the product. For example, 25% of the sum assured can be paid annually over a four-year period.

Some products may give an option for your nominee to receive this as a lump sum too.

Let's consider the example of Madhav again. Madhav has appointed his wife, Divya as nominee and the death benefit shall be given to Divya in case he passes away.

If Madhav passes away during the 11th policy year, his wife, Divya is entitled to receive Rs 40 lakhs, along with any accrued bonuses, as a lump sum in 2032. The policy will terminate after the death benefit has been paid to her.

Stock market fluctuations have a direct impact on financial instruments like mutual funds. In contrast, endowment plans offer guaranteed returns, thus making them low-risk investments. Endowment plans provide promised returns to you or your nominee.

You will receive the maturity benefit if you survive the policy period. Your nominee shall receive the death benefit in case you pass away.

An endowment plan can also serve as collateral for loans. It can be used to get a loan to pay for your long-term goals, i.e, your spouse's higher education or your child's wedding etc.

For example, suppose you need a loan to buy a new apartment. You can use the endowment plan as collateral for the loan.

A participating endowment plan may also offer bonuses in addition to the maturity and death benefits. An endowment plan offers four types of bonuses -

Reversionary Bonus
The insurance company awards this bonus at the end of every financial year. The bonus won't be given to you immediately but instead gets accumulated every year under the policy. It is then paid either to you when the policy matures or to your nominee in the event of your death during the policy period.

The reversionary bonus is further divided into two types -

• Simple reversionary bonus:
  The reversionary bonus rate is multiplied by the sum assured to get the simple reversionary bonus.
  
  Let’s Say Bhargav has purchased a Rs. 40 Lakhs Participating Endowment policy. The policy offers a simple reversionary bonus at the rate of 5% of the sum assured for the first 10 years of the policy.
  
  Simple Reversionary Bonus = Reversionary Bonus Rate * Sum Assured
  = 5% * 40,00,000
  = 2,00,000
  
  Total bonus over 10 years = 2,00,000 x 10 = 20 Lakhs
  
  Hence, Bhargav is entitled to receive Rs. 20 Lakhs as simple reversionary bonus with the maturity benefit or the bonus shall be paid to his nominee along with the death benefit.


• Compound reversionary bonus:
  It is calculated by multiplying both the sum assured and the previously accrued bonuses with the reversionary bonus rate.
  
  Let's look at Bhargav’s example again and assume that the policy offers a compound reversionary bonus at a rate of 5%.
  
  In the 1st year:
  
  • Sum assured is Rs. 40,00,000
  • Bonus will be Rs. 2,00,000 (5% of 40,00,000)
  
  

  In the 2nd year:

  • Sum assured will become Rs. 42,00,000 (40,00,000 + 2,00,000 bonus)
  • Bonus will be Rs. 2,10,000 (5% of 42,00,000)
  
  

  In the 3rd year:

  • Sum assured will become Rs. 44,10,000 (42,00,000 + 2,10,000 bonus)
  • Bonus will be Rs. 2,20,500 (5% of 44,10,000)

This cycle shall continue till the policy expires or in case he passes away.

• Terminal Bonus
  A terminal bonus, also known as a persistency bonus, is given to you at the end of the policy term or to your nominee in case you pass away while the policy is in effect. This bonus is paid at the insurer's discretion, so there is no guarantee that you or your nominee may receive it.


• Interim Bonus
  Typically, bonuses are announced at the end of the financial year. However, an interim bonus is paid if a policy matures or death occurs between consecutive bonus declaration dates. In this case, the bonus is calculated based on the remaining days from the previous bonus date. The main objective behind this bonus is to ensure you and your nominee don't miss out on any benefits.


• Cash Bonus
  Contrary to other bonuses that accumulate throughout the policy period, a cash bonus is paid to you in the form of cash at the end of every financial year. This type of bonus is defined as a percentage of your annual premium and is payable every year.

Under an endowment plan, you also receive tax benefits⁴ for the premiums and the maturity benefit. The Income Tax Act of 1961 offers these advantages under different sections.

• Under Section 80C of the Income Tax Act, 1961, you can claim a tax deduction of up to Rs. 1,50,000 on the annual premiums you pay.
• Under Section 10(10D)³, the maturity benefit you receive at the end of the policy term is exempted from taxation.

So, these are the benefits offered by an endowment plan. An endowment plan is an ideal choice if you are seeking both insurance cover and a savings plan. Ensure you read the policy wordings before purchasing a policy in order to avoid any hassles later on. And, there are multiple types of endowment plans that you can choose from - depending on your needs. These will be explored in the next article.