Features of Endowment Policy

10 Features of Endowment Policy

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Several features of endowment policies make them an attractive investment option. But just like any other type of insurance, you are likely going to encounter certain challenges that will give rise to some queries like where to invest, how to invest, which is the best option for you and your family, and many other similar questions that may bother you.

An endowment policy can solve most of these problems, as it comes with the dual benefits of a life insurance policy and a savings plan. So, if you’re thinking about purchasing an endowment policy, you will get to understand several things concerning this policy. So stick around.

Before we dive right into the features of an endowment policy, let’s take a moment to get acquainted with what this insurance is all about.

Features of Endowment Policy

What is Endowment Policy?

This is a type of insurance policy that provides life coverage and pays a sum of money if the policyholder is still alive after an agreed-upon period. An endowment policy is designed to provide a lump sum upon maturity or death.

The typical maturity periods are ten, fifteen, or twenty years, up to a certain age limit. Some policies also pay out in the case of a critical illness or during a policyholder’s retirement years.

Benefits of Endowment Policy

The following are the benefits of an endowment policy:

1. Tax-deferred Growth

What this is saying is that, with endowment policies, you won’t have to pay taxes on the gains you’ve accumulated until you withdraw the money. This is a big benefit, as it allows your money to grow faster.

2. Ability to Access Cash Value

One of the biggest benefits of endowment policies is the ability to access the cash value of the policy. Now, this is a key feature that distinguishes endowment policies from other types of insurance, such as term life insurance.

With an endowment policy, you can borrow against the cash value, which can be used for any purpose.

This can be a great way to access funds in an emergency or to fund other goals. However, it’s important to understand that loans against the cash value will reduce the overall value of the policy.

3. Fixed Interest Rates

Endowment policies offer fixed interest rates, which are a major advantage to policyholders. This interest rate is different from that of investments, which can either go up or down depending on the performance of the invested asset.

With a fixed interest rate, you can be confident that your money will grow at a consistent rate. This can make it easier to plan for your financial future.

4. Death Benefit

This is the amount of money that will be paid out to your beneficiaries if you die while the policy is in force. There are so many things that your death benefit can be used for, such as to pay for final expenses, to replace lost income, to pay school fees, or for any other purpose.

When you are choosing an endowment policy, it’s important to consider the death benefit amount carefully to make sure it will meet your needs.

5. Flexibility to Adjust Coverage

As your needs change, you can increase or decrease the amount of coverage you have. This is a major advantage over other types of insurance, which typically have fixed coverage amounts.

The flexibility to adjust your coverage can be useful if your income or family size changes or if you need to adjust your coverage for other reasons.

6. Endowment Policies Can be Tailored to Your Needs

There are a variety of different options available, so you can choose the policy that’s right for you. For instance, you can choose the term of the policy, the amount of coverage, and the payment schedule.

You can also add riders to your policy to customize it even further. This flexibility makes endowment policies a good option for many people.

Limitations of an Endowment Policy

The following are the limitations of an endowment policy:

Higher Premiums Than Other Types of Insurance

One of the biggest drawbacks of endowment policies is that they typically have higher premiums compared to other types of insurance.

This is because they combine savings and insurance in one policy, so you’re essentially paying for two products. So it’s important to weigh the cost of the premiums against the benefits of the policy to decide if it’s right for you.

Potential Loss of Value if You Surrender the Policy Early

When you surrender a policy, you receive the cash value of the policy minus any surrender charges. The surrender charges can be significant and may eat into the value of the policy.

This is especially true in the early years of the policy when the cash value is still low. So if you need to access the cash value of the policy for any reason, you could end up losing money.

There is Potential for Confusion About How the Policy Works

There are many different components to this policy, such as death benefits, cash value,  surrender charges, etc.

It can be difficult to understand how these different components interact and to know how much money you’ll get back if you surrender the policy early.

This can make it hard for you to compare endowment policies to other options, and to make an informed decision about whether or not to purchase one.

May Not be Suitable for Everyone’s Needs

An endowment policy is usually best suited for people who are looking for a way to save money and at the same time, have some life insurance protection.

Therefore, if you’re not looking for life insurance or if you’re not interested in saving money, an endowment policy may not be the best choice for you.

It’s important to talk to a financial advisor to see if an endowment policy is right for your needs.

The Death Benefit May Not be Enough to Cover all Expenses

Before going into detail, let’s first of all say that,  for instance, if you have a large mortgage or other debts, the death benefit may not be enough to pay them off.

So it’s important to consider how much coverage you need before you purchase an endowment policy.

Types of Endowment Plans

Below are the different types of endowment plans:

1. Guaranteed Policy

As the name suggests, a guaranteed policy assures the policyholder of a maturity benefit. Hence, if the policyholder outlives the tenure, he or she will receive the maturity benefit.

In case there’s a sudden demise of the insured, the beneficiary will receive the sum assured.

2. Unit-Linked Endowment Plan

In this type of endowment plan, the premium that you pay towards the plan is invested in two parts.

One part goes towards the insurance plan, and another part is invested in various investment instruments as picked by the policyholder at the time of entering the plan.

This plan is riskier than a guaranteed policy, as market-related investments are involved.

3. A non-profit Plan

This plan does not provide any bonuses; hence, it is referred to as “non-profit.” The insured will only receive the sum assured upon maturity, or the beneficiary will receive a death benefit.

4. Low-cost Plan

A low-cost endowment plan allows the policyholder to accumulate wealth over a specific period. This period comes as a lock-in period only, after which your policy will mature.

In case the policyholder passes away before the lock-in period, the beneficiary will receive the target amount as the sum assured.

5. Full Profit Plan

With a full-profit plan, the insured receives a predetermined sum assured, which is guaranteed right from the beginning of the policy.

The insured might receive a bonus along with the maturity amount. The nominee would receive the same in the event of the untimely demise of the insured.

10 Features of Endowment Policy

The following are the features of an endowment policy:

Overview of the Features of an Endowment Policy

1. Death Benefit

This is the sum that your family or beneficiaries will be paid if you die while the policy is still active.  This benefit can be used to pay off debts, provide for your family or any other purpose.

2. Cash Value

As you pay your premiums, a portion of the money goes into the cash value account. This grows over time, and you can access the money through loans or withdrawals.

The cash value can be used to cover expenses, or it can be used to help pay for the policy if you can’t make the premium payments.

3. Surrender Charges

When you purchase an endowment policy, you may have to pay surrender charges if you cancel the policy early.

Surrender charges are designed to discourage policyholders from canceling their policies before they reach maturity.

The amount of the surrender charge varies depending on the policy, but it can be a significant amount of money.

It’s important to understand the surrender charges before you purchase a policy, so you know what you’re getting into.

4. Maturity Date

This is the day on which the policy becomes fully mature and pays out the death benefit and the cash value. Usually, this happens after a certain number of years, such as 10, 15, or 20 years.

Now, when purchasing this policy, you have to look out for a maturity date that meets your needs and that you’re also comfortable with.

5. Dividends

Dividends are shares of the profits from insurance companies. They vary from time to time, depending on how profitable the company is. That is to say that they are not always guaranteed.

The thing is, if your policy does pay dividends, it can be used to reduce your premiums, increase the death benefit, or increase the cash value.

Dividends are an important factor to consider when purchasing an endowment policy because they can have a significant impact on the overall value of the policy.

6. Loans

Loans can be used for any purpose, and they don’t have to be repaid until the policy matures. However, when loans are made against the cash value, it can reduce the death benefit and the overall value of the policy.

It’s important to understand how loans work before you take one out, and you also need to consider the interest rate and repayment terms.

7. Premiums

These are the payments that you have to make to keep the endowment policy in force. The sum you get to pay as a premium is determined by several factors, like your age, health, the amount of coverage you need, etc.

Some policies offer flexible premium payments, which can be adjusted to align with your budget and needs.

8. Riders

Riders are optional benefits that can be added to an endowment policy. These benefits can include things like critical illness coverage, accidental death coverage, or a waiver of the premium.

Adding a rider can increase the premium you pay, but it can also increase the value of the policy.

9. Beneficiaries

When you purchase an endowment policy, you’ll need to name who your beneficiary is. This is the person or people who will receive the death benefit if you die while the policy is in force.

The thing about this is that you can change your beneficiary at any time, as long as you follow the terms of the policy.

You can also name a secondary beneficiary in case something happens to the first person you chose as a beneficiary.

10. Guaranteed Life

Guaranteed life is a type of endowment policy that offers a guaranteed death benefit, regardless of your health.

This can be a good option for people with health issues or for people who want to make sure their beneficiaries are taken care of.

However, guaranteed life policies typically have higher premiums than other types of endowment policies.

Eligibility Criteria for Endowment Policy

Below are the eligibility criteria for the endowment policy:

  • To become a policyholder, you have to be up to 18 years of age and not more than 70 years old. However, some plans may allow for the purchase of a policy as soon as an individual is born.
  • The minimum age for a policy to mature is 18 years. Therefore, if your parents had invested in an endowment plan when you were a minor, it would help you finance your higher education.

FAQs on Features of Endowment Policy

Can I cash out my endowment policy early?

In most cases, you can cash out your endowment policy early. However, you may have to pay surrender charges, and you may lose some or all of the cash value. It's important to check with your insurance company before you make any decisions.

Can I borrow against the cash value of my endowment policy?

Yes, you can usually borrow against the cash value of your endowment policy. However, this may reduce the death benefit and the cash value of your policy

What happens to my endowment policy if I die?

If you die while the policy is in force, the death benefit will be paid to your beneficiaries.

Can I change the beneficiary on my endowment policy?

Yes, you can usually change the beneficiary on your endowment policy. However, there may be some restrictions, so it's important to check with your insurance company.

Who is eligible to purchase this insurance?

An endowment policy helps build a lump sum of money over a long period of time. Hence, individuals with a regular source of income and plans for the future should consider purchasing an endowment policy.

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Endowment policies offer a unique combination of insurance and savings which can be customized to meet your specific needs.

They also offer a variety of benefits like death benefits, tax advantages, flexibility, and many more.

When choosing an endowment policy, it’s important to consider your specific needs and consult with an insurance professional to find the right policy for you.