Endowment Policy

Endowment Policy

While it is common knowledge that life insurance plans cover the risk of dying too early, did you know, that they can help you save too?

Life insurance plans come in different forms. While the term insurance policy provides unmatched protection against the risk of death, other life insurance plans are savings oriented which help you create a corpus for your financial goals. One such type of savings oriented life insurance policy is an endowment policy.

Let’s explore the basic tenets of the plan –

What is an Endowment Plan?

An endowment policy is a life insurance policy which covers the risk of premature death during the policy tenure. However, if the insured survives the policy tenure, a maturity benefit is paid to the policyholder.

For example, imagine you purchase an endowment policy for a sum assured of ₹ 10 lakhs and a term of 20 years. If the policy holder passes away during this period, a death benefit is paid to the nominee. However, if the policyholder survives the full 20-year term, the plan matures and a maturity benefit is paid. This makes it similar to a term insurance with maturity benefit, offering both protection and savings. Now, the endowment plan meaning becomes clearer with example.

How Does an Endowment Life Insurance Work?

An endowment life insurance plan provides both life coverage and savings, ensuring financial security for policyholders and their families. Here’s how it works:

1. Premium Payment

   • The policyholder pays regular premiums throughout the policy term, which are allocated toward life insurance and savings.

2. Life Cover Protection

   • In case of the policyholder’s death during the policy term, the nominee receives the sum assured along with any applicable bonuses.

3. Maturity Benefit

   • If the policyholder survives the term, they receive a lump sum payout, including the sum assured and bonuses.

4. Bonuses & Additions

   • Some plans offer additional bonuses, such as reversionary or terminal bonuses, enhancing the payout amount.

5. Tax Benefits

   • Premiums qualify for deductions under Section 80C, and maturity proceeds are tax-free under Section 10(10D).

Endowment life insurance plans are ideal for individuals seeking long-term financial security with guaranteed savings and a low-risk investment profile.

Types of Endowment Plans

Endowment plans offer a blend of life insurance and savings, catering to different financial needs. Here are the common types of endowment plans  available:

Full-Endowment Plan

The sum assured is decided at the start, but the final payout may increase due to bonuses.

Low-Cost Endowment Plan

Designed for goal-based savings, it helps accumulate funds for future expenses like loan repayments.

Unit-Linked Endowment Plan

A market-linked plan where the premium is invested in equity and debt funds, offering higher return potential.

Non-Profit Endowment Plan

Provides a guaranteed sum without any additional bonuses.

With-Profit Endowment Plan

Offers a combination of guaranteed returns and bonuses based on the insurer’s profits.

Choosing the right endowment plan  depends on financial goals, risk appetite, and long-term saving objectives.

 Also Read: Best Short Investment Options in India in 2025

Salient features of endowment plans 

Some of the salient aspects of endowment insurance plans are as follows –

Traditional and guaranteed plans

You would find the words ‘traditional’ and ‘guaranteed’ associated with endowment plans. Let’s understand why –

Endowment plans are called traditional plans because they do not invest your premium in market-linked instruments like ULIPs do.

The word ‘guaranteed’ is often used in the context of an endowment plan because your investment is not exposed to market volatility. The maturity or the death benefit is guaranteed even when the markets are volatile.

Traditional and Guaranteed Plans: Understanding the Trade-Off

You would find the words ‘traditional’ and ‘guaranteed’ associated with endowment plans. Let’s understand why –

• Traditional: Endowment plans are called traditional plans because they do not invest your premium directly in market-linked instruments like ULIPs do.
• Guaranteed: The word ‘guaranteed’ is often used in the context of an endowment plan because your core investment is not exposed to market volatility. The maturity or the death benefit is guaranteed even when the markets are volatile.
• The Trade-Off: While providing guaranteed safety, this low-risk nature generally results in lower potential returns compared to pure market-linked investments over the long term. This makes them a conservative choice for savings.

Possibility of whole life protection

Nowadays, endowment plans have evolved to provide protection up to 99 or 100 years of age. Such plans are called whole life plans, and they ensure lifelong protection. You pay premiums up to a limited period and the plan continues to run till you reach 99 or 100 years of age.

Lump sum pay-out on death or maturity

Usually, endowment life insurance plans pay a lump sum benefit on early death or after the plan matures. The benefit comprises of the sum assured and any bonus or other additions offered by the plan. However, some endowment plans might give you the flexibility of availing the maturity or death benefit in instalments or partly in lump sum and partly in instalments.

Optional riders

Lastly, almost all endowment plans come with optional riders that help in enhancing the coverage of the policy. You can choose from the list of available riders and customize your coverage as per your needs.

Also Read: Tips To Grow Your Savings Without Sacrificing on Fun

Key Benefits of an endowment policy

An endowment plan can be a good addition to your portfolio for the following reasons

Guaranteed Death Benefit along with Maturity Benefit

First and foremost, an endowment plan becomes a popular choice because of the returns that it promises. The sum assured is the minimum guaranteed benefit that you receive from the policy. Moreover So, if you want returns and avoid volatility risks, endowment plans can prove to be an ideal bet.

Wealth creation for financial goals

Endowment plans are long-term plans which help you create a corpus for your long-term financial goals. You can save in a disciplined manner during the policy tenure and create a corpus for your child’s higher education, for buying a home, for your child’s marriage, or for any other need. The bonus and other additions also enhance the corpus so that you can fulfil your financial goals optimally.

Insurance protection and Financial Security for Loved Ones

Let’s not forget the insurance cover that an endowment plan provides. In the case of premature death, the endowment policy comes to the rescue of your family and provides them with financial assistance. You can, thus, secure your family’s finances with the help of an endowment plan.

Tax benefits and Disciplined Savings

Provides life cover while helping you accumulate wealth for future financial goal Endowment life insurance plans are tax-saving avenues which let you save tax on the premium payment. The premium is allowed as an eligible deduction under Section 80C up to Rs.1.5 lakhs. Moreover, the bonus and other additions as well as the maturity benefit earned are completely tax-free in your hands. So, with endowment plans, you can create a tax-efficient corpus and enjoy tax benefits on investments too.

With the range of endowment plans available in the market, you can choose a comprehensive cover too. Aviva also offers a variety of endowment insurance policies which can help you create an attractive financial corpus. Understand what an endowment plan and its benefits is so that you can choose a suitable policy for your financial needs as well.

Also Read- Strengthen family bonds with the protection of Endowment Insurance

Crucial Tax Updates: GST and Section 10(10D) Conditions

Endowment plans offer tax benefits in India, making them a preferred option for those seeking savings and life insurance coverage. Here’s how taxation works as per current laws:

• Tax Deduction on Premiums: Premiums paid towards endowment life insurance qualify for tax deductions under Section 80C of the Income Tax Act, up to ₹1.5 lakh per year.
• Tax-Free Maturity Benefits (Section 10(10D)): The maturity amount, including bonuses, is tax-free under Section 10(10D) if the annual premium does not exceed 10% of the sum assured for any year during the policy term (for policies issued after April 1, 2012).
• Tax-Free Death Benefits: In case of the policyholder’s demise, the death benefit received by nominees is fully tax-exempt under Section 10(10D).
• TDS Applicability: If the premium exceeds 10% of the sum assured, TDS is deducted at 5% on the taxable maturity amount under Section 194DA.
• Latest GST Update: As per the latest regulations, premiums paid for individual life insurance products, including endowment policies, are currently exempted from Goods and Services Tax (GST) (This is subject to changes in the prevailing tax laws and the latest circulars).

Endowment plans offer a combination of financial security, guaranteed savings, and tax benefits, making them a tax-efficient investment option.

Understanding Policy Surrender and Paid-Up Value

A policy is said to be surrendered when the policyholder decides to terminate the contract before its maturity date. It is essential for policyholders to understand the implications of early exit.

• Acquisition of Surrender Value: An endowment policy acquires a Surrender Value (SV) only after premiums have been paid for a minimum stipulated period, typically 2 or 3 consecutive years.
• Types of Surrender Value:
  • Guaranteed Surrender Value (GSV): This is a percentage of the total premiums paid (excluding the first year's premium and rider premiums). The percentage is fixed and increases with policy duration.
  • Special Surrender Value (SSV): This value is usually higher than the GSV and is calculated based on the Paid-Up Value (reduced sum assured) plus accrued bonuses, multiplied by a Special Surrender Value factor.
• Loss of Benefits: Surrendering an endowment plan prematurely leads to a significant financial loss, as the SV received is often less than the total premiums paid. Furthermore, the life cover ceases immediately.
• Paid-Up Policy: If you stop paying premiums after the policy has acquired a surrender value, it may convert into a Paid-Up Policy. The life cover and maturity benefit are reduced to a Paid-Up Sum Assured, and the policy continues for the rest of the term without further premiums.

Why Should You Buy an Endowment Policy?

An endowment assurance policy offers a combination of life insurance and savings, making it a reliable financial tool. Here’s why you should consider investing in one:

• Guaranteed Maturity Payout

Ensures a lump sum payout at maturity if the policyholder survives the term.

• Financial Security for Loved Ones

If the policyholder dies, the family receives a death benefit, ensuring financial stability.

• Tax Benefits

Premiums qualify for deductions under Section 80C, and maturity proceeds are tax-free under Section 10(10D).

• Disciplined Long-Term Savings

Encourages regular savings through fixed premium payments.

• Low-Risk Investment

Suitable for risk k-averse individuals seeking stable and guaranteed returns.

An endowment assurance policy is ideal for those looking for a secure, long-term financial plan with insurance protection.

 

Documents Required for an Endowment Policy

To purchase an endowment plan , you must submit specific documents for identity verification, financial assessment, and policy processing. Below are the key documents required:

Identity Proof

Aadhaar Card, PAN Card, Passport, Voter ID, or Driving License.

Address Proof

Utility bills, Aadhaar Card, Passport, or Rental Agreement.

Income Proof

Salary slips, Income Tax Returns (ITR), Form 16, or Bank Statements to assess financial eligibility.

Age Proof

Birth Certificate, Aadhaar Card, or School Leaving Certificate.

Photographs

Recent passport-size photographs for policy records.

Medical Records (if required)

Some endowment plans require a medical check-up based on age and sum assured.

Submitting these documents ensures a smooth policy approval process. Endowment plans provide financial security, guaranteed savings, and tax benefits, making them a reliable long-term investment option.

  Also Read: How to save Tax with ULIPS

Are Endowment Plans Tax-Free in India?

Endowment plans offer tax benefits in India, making them a preferred option for those seeking savings and life insurance coverage. Here’s how taxation works:

• Tax Deduction on Premiums:

Premiums paid towards endowment life insurance qualify for tax deductions under Section 80C of the Income Tax Act, up to ₹1.5 lakh per year.

• Tax-Free Maturity Benefits:

The maturity amount, including bonuses, is tax-free under Section 10(10D) if the annual premium does not exceed 10% of the sum assured.

• Tax-Free Death Benefits:

In case of the policyholder’s demise, the death benefit received by nominees is fully tax-exempt under Section 10(10D).

• TDS Applicability: 

If the premium exceeds 10% of the sum assured, TDS is deducted 5% on the maturity amount under Section 194DA.

Endowment plans offer a combination of financial security, guaranteed savings, and tax benefits, making them a tax-efficient investment option.

 

Endowment Plans Related FAQs

1. What is an example of an endowment plan?

An example of an endowment plan is a life insurance policy that provides a lump sum payout after a fixed term or on the policyholder’s death, such as LIC’s New Endowment Plan. This helps in understanding the endowment plan meaning clearly

2. What is the age limit for an endowment policy? 

The age limit varies by insurer, but typically, endowment plans are available for individuals between 18 and 60.

3. What is the difference between an endowment plan and ULIP?

An endowment plan offers guaranteed returns with life cover, while ULIPs provide market-linked returns with investment flexibility.

4. How is an endowment policy calculated?

Premiums are calculated based on the sum assured, policy term, age, and additional benefits like bonuses.

Also Read: Zero Cost Term Insurance

5. Is endowment life insurance good or bad? 

Endowment plans are good for risk-averse investors seeking guaranteed savings with insurance and financial discipline, but they offer lower wealth accumulation and returns than market-linked investments. The suitability depends entirely on the investor’s financial goals and risk tolerance.

5. Is GST applicable on premiums for an endowment plan?

No, as per the latest tax laws, premiums paid for individual life insurance plans, including endowment plans, are exempt from GST. However, tax laws are subject to change and should be verified.

5. When does an endowment policy acquire a surrender value?

An endowment policy acquires a surrender value once the policyholder has paid premiums continuously for a minimum of two or three years, as specified in the policy document.

 

AN Sep 64/22