An endowment policy is like a savings plan with life cover.
It assures a risk-free and guaranteed return on maturity as long as you make the payments agreed at the inception of the policy.
It helps you save for your future, so that you are able to get a lump sum on maturity or on death before maturity.
In other words an endowment policy is a combination of Term life insurance and an Investment.
The life cover of an Endowment policy is known as Sum Assured.
How it works?
After paying-out the cost of insurance, administrative and distribution costs, the life insurance company invests the balance of the premiums to generate an income.
The surplus of the income over the expenditure of the insurance company is redistributed to all plan holders as bonus.
This bonus is usually declared as a specific proportion of sum assured or life cover.
The bonus declared is not paid to the endowment policy holder immediately as in case of dividends.
It is added to Sum assured each year, and is payable on Maturity of the plan or on death of insured.
The process of allocating the bonus to the policy of the insured is called vesting.
The bonus so added to the sum assured at the end of every year is called Vested Bonus.
While the bonus is vested every year, it does not compound like a fixed deposit. Each year it accumulates as in case of simple interest.
The following example shows the effect of bonus on the sum assured on a 5 year endowment policy.
|Years||Sum Assured||Vested Bonus||Total|
Like all insurance plan, the Endowment policies also have some limitations.
1. Higher Premiums in comparison to other policies
The Premiums on endowment plans are usually higher than Term life or Whole of life insurance plans. This is an expensive approach to life insurance.