What are the Types of Endowment Plans?

A famous quote by the ace investor, Warren Buffet, says the following: “Never depend on a single income. Make investments to create a second source”. To save money one needs to be disciplined in their approach. While investments in the right avenue are an important part of financial planning, it is also essential to back yourself up. In the case of an unfortunate event, diluting your savings must not be the only option. That’s when a life insurance comes into the picture.

Life insurance plans help provide protection to dependents in the absence of the policyholder. However, not all plans are purely focused on protection. Some life insurance policies also balance investments along with the protection objective of a life insurance policy. Endowment policies are one such example. Here, a part of the premiums is apportioned towards savings which are then paid at the time of maturity of the insurance policy. In the event thatthe policyholder outlives the tenure of the endowment policy, the insurance company pays a maturity benefit to the policyholder. This amount can then be used to meet your financial goals like buying a house, paying for children’s education, or simply serves as a retirement corpus.

In addition to that, you can also borrow money against your policy by way of a loan against your insurance plan. The premiums paid for these plans are also deductible up to ₹ 1.5 lakhs under Section 80C of the Income Tax Act. In addition, the maturity proceeds of an endowment plan are also exempt from taxes subject to certain terms. While these are some benefits of an endowment plan, here are the five types of endowment plans you can choose from depending on your requirement:

  • Full endowment policy

A full endowment plan is also known as a with-profit policy as it guarantees a certain amount at the end of the policy period. This is known as the sum assured of the policy. The insurer pays this sum assured to the nominee in the case of an unfortunate demise of the policyholder.

Since a full endowment policy pays additional benefits by way of incentives, the maturity benefit of a full endowment policy is frequently more than the policy’s sum assured. Hence, full endowment plans can be useful to assist you in accumulating a large corpus over time.

  • Low-cost endowment policy

A low-cost endowment policy is where the premiums are lower which allows you to save for future payments that are due after a certain period. In the event of an unfortunate demise of the policyholder, the insurance company guarantees an amount that the nominees would be paid.

In addition, the yearly bonus paid for these low-cost endowment plans also boosts the amount that is paid at the retirement age. The primary goal of this plan is to set up a fund in a specified time that can be used to meet long-term objectives,such as loan repayments or the like.

  • Unitised with profit endowment policy

A unitised with profit policy combines the earning potential of a unit-linked insurance policy with guaranteed returns to safeguard your investment from fluctuations in the markets. The investment in capital markets determines the profit that shall be earned. However, by guaranteeing a pay-out at its maturity, these plans mitigate the impact of downturns that occur in capital markets. While you are guaranteed a specified amount if the capital markets do not perform well, this plan has a high earning potential.

  • Non-profit endowment policy

The simplest form of an endowment plan is a non-profit endowment policy. This plan pays a lumpsum payment at maturity if the policyholder outlives the tenure of the endowment plan. Alternatively, it pays a sum assured to the nominees in the case of an unfortunate demise of the policyholder. As the insurer does not provide any bonus with these plans, the pay-out amount remains static.

  • Unit-linked endowment policy

A unit-linked endowment policy is ideal for buyers looking to assume a lot of risks to get the most bang for their buck. Here, the insurance premium is used to buy investment fund units in this fixed-term plan. The performance of the securities market determines the fund’s performance eventually. In addition to this, life insurance coverage is also provided.

Among the different types of endowment policies, selecting one can be confusing. To zero down on one, a life insurance calculator can come in handy.

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