Things To Keep In Mind When Purchasing An Endowment Plan

Things To Keep In Mind When Purchasing An Endowment Plan

An Endowment Plan, also known as a Guaranteed Plan, is a type of life insurance plan that offers financial security to your family against life's uncertainties while helping you accomplish your financial goals. Buying such a plan is a long-term commitment. It spans decades - you need to pay premiums for many years before finally receiving the payout.

So, it is important that you know what you’re getting into exactly, especially because your hard-earned money is involved. Here’s a checklist that we’ve curated of a list of things to consider while purchasing an Endowment Plan.

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Things to Keep in Mind Before Purchasing an Endowment Plan

  • Identify Your Financial Goals
    You buy an Endowment Plan to receive a specific amount after a certain period of time to fulfil your dreams/goals, like spouse's education, child's higher education, child's marriage, setting up a business after retirement etc. So, the first and most important thing you need to do before investing your money in Endowment Plans is to evaluate your financial objectives.

  • Determine The Maturity Amount That Is Right For You
    A Endowment Plan provides a maturity benefit if you survive the policy period. The maturity benefit can be -

  1. The sum assured that you choose at the time of purchase.
  2. The total premiums you pay during the premium payment period.
  3. A percentage of the total premiums you pay during the premium payment period.

When you are determining how much coverage you need, you need to weigh your goals and needs. Proper research should go into the final estimation since the coverage should be sufficient to achieve these financial goals.

Example: Madhav needs Rs. 45 Lakhs to meet his daughter’s higher studies expenses and to set up a business after retirement. So he can buy an Endowment Plan with a sum assured of Rs. 45 Lakhs.

  • Decide How Long The Policy Should Last
    The duration of your policy should correspond to the time frame after which you will need the policy payout to accomplish your goals. A maturity benefit will be paid by the insurance company only if you survive till the end of this policy duration. Consequently, choose a policy duration that corresponds to the goal you're saving for.

    Example: Sara, a 30-year-old woman, is currently working at a private firm. She wants to buy an Endowment Plan to save for her dream boutique, which she plans to open after her retirement at the age of 50. So, she buys an Endowment Plan with a policy period of 20 years.

  • Be Aware Of Your Financial Responsibilities
    Endowment Plans pay you maturity benefits only after the policy period ends. This clearly means that your money will be tied down for an extended and fixed period of time. By signing the Endowment Plan, you are agreeing to this financial commitment over the long term.

    Please note that the Maturity benefit or Death benefit is only payable if certain conditions are met -

  1. Maturity benefit will be paid in case you survive the policy period.
  2. Death benefit will be paid if you pass away in the middle of the term.

Can You Withdraw Money During The Policy Period?

Yes. It is possible to withdraw money during the policy period, but do keep in mind that this can entail a substantial loss in funds accumulated under your policy.

  • Be Aware Of Your Premium Payment Commitment
    As mentioned earlier, investing in an Endowment Plan is a long-term commitment and to keep the policy active you need to pay the premium on time. Based on the type of policy, these premiums can cost you a bit.

    As you will be paying these premiums for a long time, it is important that you have a steady stream of income so that you can pay them on time. In the absence of payment, your policy may lapse or become a reduced paid-up policy - which is something you don't want to happen because of the significant losses you’ll incur.

  • Choosing The Right Premium Payment Term Is Essential
    It is important to choose the premium payment period that is convenient for your budget. With an Endowment Plan, you can choose between three different premium payment options.

  • Regular Pay
    In this case, you will be required to pay the premium until the policy period ends.

  • Single Pay
    This option allows you to pay your entire premium at once while ensuring you are covered financially throughout the policy period.

  • Limited Pay
    Choosing this option will allow you to get the premium liability off your chest as soon as possible. You can pay off all your premiums in faster and larger instalments in a limited time frame, and enjoy coverage till the policy term ends.

Example: Bhavna, a 35-year-old, buys an Endowment Plan for a duration of 30 years.

Let’s take a look at how she’ll pay the premiums under the three options.

Regular Pay Single Pay Limited Pay
Bhavna needs to pay the premiums until the end of the policy period (30 years) to keep her policy active. She needs to pay the entire policy premium in a single go while purchasing the policy. If she chooses 15 years as the premium payment period, she can pay off all her premiums within this time period and enjoy the cover for the rest of her life.

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  • Determine The Right Frequency For Premium Payments
    Endowment Plans also give you the option to choose your premium payment frequency, meaning how frequently you wish to pay your premium. You might find this option appealing if you have difficulty making large premium payments.

    Depending on your comfort, you can choose from four options -

  • Annual Option
  • Semi-annual Option
  • Quarterly Option
  • Monthly Option

Note: Regardless of the frequency of your premium payment, you should set up an auto-debit or standing instruction on your bank account. By doing so, you will prevent your policy from lapsing due to non-payment of premiums.

  • ROI (Return On Investment) Analysis
    While choosing the right cover amount is crucial, knowing how much you'll get back is equally important. It is possible to obtain this information from your financial advisor, who will provide you with the Internal Rate of Return (IRR) for the money you have invested.

What is IRR?

  • The IRR is a financial metric that compares the returns between cash inflows and cash outflows.
  • This metric calculates and shows you how profitable your investment is. A higher IRR indicates that your investment is good.

Ensure that you have all the pertinent information before you invest your hard-earned money. You should only proceed if the returns seem favourable to attain the goal in question.

  • Review The Policy Surrender Benefits
    There may be several reasons for which you may want to discontinue or surrender your Endowment Plan -

  • A financial setback may prevent you from paying premiums.
  • Your existing plan is not satisfactory, and you want to buy a new plan with better benefits and features.
  • The Endowment Plan no longer serves your needs. So, you don't want it anymore

While knowing how much returns, etc. you'll receive under the policy is crucial, it is also important to understand how much money will be lost if you discontinue it. Ensure you understand the after-effects of discontinuing or surrendering your Endowment Plan.

  • Assess The Performance Of The Insurance Company
    As important as it is to buy a policy after weighing its features, benefits, etc., it is equally important to buy it from a right and genuine insurer.

    A good insurer will make sure your policy journey is seamless. And, should there be any issues during the policy period or at the policy maturity, he will make sure they are resolved.

  • How Can You Check The Performance Of The Insurance Company?
    To make an evaluation, you can look at the following factors:

  • The company's claim settlement history.
  • Existing policyholders' returns.
  • Reviews left by previous customers. You can gain a better understanding of the insurer's services by reading reviews.
  • Choose Riders With Your Base Plan
    Riders are optional add-ons that offer additional benefits. You can add to your existing Endowment Plan at a certain extra cost.

  • Features of Riders

    • Riders provide a broader range of coverage, enhancing your protection.
    • Adding riders requires no extra steps. There are no additional medical tests or documentation required besides those you already complete for your base plan.
  • An Endowment Plan Typically Come With The Following Riders -

    • Critical Illness Rider
    • Accidental Death Benefit Rider
    • Accidental Disability Rider
    • Hospital Care Rider
    • Surgical Care Rider
    • Waiver of Premium due to Disability Rider
    • Waiver of Premium due to Critical Illness Rider

Note: There are also other types of riders that insurers may offer besides those listed above. It is therefore critical that you read the policy wordings and brochures before signing up.

  • Learn About The Free-Look Period
    Free-look period is a time period given by your insurer during which you can evaluate a policy thoroughly before purchasing it. In this period, you can go over the terms and conditions, limitations, and exclusions of the policy.

    Your policy can be returned if you are not satisfied or if it does not meet your expectations or those of your family. You are not liable to pay any penalty or cancellation fee.

    Note: Depending on the insurer, the lengths and conditions of free-look periods under Endowment Plans can differ. Therefore, you should speak to your insurer before purchasing the policy to get all the necessary information.

  • Be Aware of The Grace Period And The Revival Period
    Have you ever thought about what would happen if you miss your premium due date? Your policy will lapse. And, to save you from that, the grace period and revival period come to the rescue.

  • Grace Period
    The grace period is the extra time period you are given to pay your premium. You can pay the premium due during this period without affecting your insurance coverage.

    As mentioned before, failure to pay your premiums within the grace period will cause your policy to lapse. As a result, you will no longer be able to receive any of the policy’s benefits.

  • Revival Period
    The revival period allows you to revoke your policy, it is has lapsed.

    Note: Different insurers impose different conditions on grace periods and revival periods. Therefore, before purchasing a policy, you should be aware of the grace and revival periods stipulated under your policy.

  • Choosing The Right Nominee is Crucial
    A nominee is the person who will receive the death benefit if you pass away during the policy period. Hence, it is essential to designate a nominee (or nominees) at the time of purchasing an Endowment Plan.
    The nominee can be anyone in your family -

  • Spouse
  • Children
  • Parents
  • Siblings, etc.
  • Conduct Thorough Research
    You made an excellent decision by choosing to buy an Endowment Plan.

    So, What's the next step? - Picking the right one in the lot.

    The market is flooded with options, making the task of selecting the right one even more challenging. So, it is important to conduct extensive research and analysis before investing your money.

    A variety of online platforms are available to compare benefits, features, and limitations, as well as returns, bonuses, and past performance of insurance companies. By using them, you can find the policy that is appropriate for you and your family.

  • Seek Advice From A Financial Advisor

    Getting your head around insurance brochures and confusing website content can be daunting. So, it makes sense to have someone on your side who is familiar with insurance - a financial advisor.

    Endowment Plans are essentially savings and insurance plans bundled together as one. To ensure that nothing goes wrong with this long-term investment, you should consult a financial advisor.

    A financial advisor can serve as your best ally, as they shall -

  • Help you choose the ideal policy for you and your family.
  • Answer any questions you may have about it.
  • Guide you through the whole process, and help you make a wise decision.

Summing Up!

Investing in an Endowment Plan is a long-term decision. A wrong decision will cost you money and time. Hence, when purchasing an Endowment Plan, consider all the factors discussed in this article. These things will help you make a well-informed decision about your investment and also prevent you from encountering any problems in the future.