These policies are financial plans targeted at a specific goal

We are going to look at a policy with a defined term and with a maturity or survival benefit: an endowment policy.

The ‘bonus’ is that it offers a bonus as well, a sharing of the investment profit of the policy premium by your insurance company. The bonus is for those who opt for a with-profit policy and has its own terms and conditions.

Though it was not always popularised with this name, the endowment policy is the most commonly known life insurance policy in India.

We are all familiar with policies pitched as financial plans targeting a specific life event or goal, like funding a child’s wedding or higher education. Those would usually be endowment policies.

The policy maturity is timed for this event and the maturity value, sum assured (SA) plus bonus, if any, will be available right in time for it. This is in addition to the basic value that, should the policyholder die before the maturity date, the SA and accrued bonuses, if any, will be paid as the death claim. While this SA is guaranteed, the bonus or its quantum, you should note, are not.

Past-year bonuses can be a guide but no guarantee. A typical scenario would look like this. A 28-year-old man would like his new born son or daughter to have an assured cushion of funding for higher studies when passing out of higher secondary or Class 12. His target would be an endowment for 17 years with a sum assured of, let us say, ₹10 lakh.

Policy premium

The premium for the policy depends on three factors. The age of the life assured, the term of the endowment and the SA. With various companies, it is around ₹55,000 to ₹60,000 a year. The health status of the proposer is also an important factor. An endowment policy has various features. The core is insurance against the risk of death, the second is a survival or maturity benefit and a third feature is investment returns, or the savings part of the policy.

The term policy has only the first function. So, the endowment policy premium is higher than a comparable term policy premium to pay for the added benefits.

While considering the asset creation function of an investment, life insurance policies have a great advantage over regular savings like deposits and so on. The entire asset gets created the moment the policy starts, thus protecting against the greatest downside of dying too soon. The caveat is, the policy has to be kept in force by paying the premiums on schedule or the advantage will be lost. Added benefits of taking this route for savings and asset creation is that the premium has a tax benefit and the policy proceeds are tax-free, both when it is a maturity claim or a death claim, a considerable advantage indeed. Popular policies are HDFC Life Endowment Assurance Policy, LIC New Endowment Policy and SBI Life Smart Bachat.

As with many life policies, you can opt for various riders right at the beginning such as accidental death rider, critical illness cover, disability rider or the waiver of premium rider.

Many buy a life insurance policy looking at it in isolation. A better way is to see and compare the range of policies available and pick the best suited to your situation and needs.

In this process of familiarising you with various types of policies we will look at unit-linked insurance policies in the next instalment of Cover Note.

(The writer is a business journalist specialising in insurance & corporate history)

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