How Endowment Plans Work?

Endowment Plans Working Process

An endowment life insurance is a combination of insurance and savings i.e. the life of the person taking the Policy is Insured for a certain amount. This life cover is termed as the sum assured. What exactly happens is that, a certain part of the Premium gets distributed towards this sum assured, some part of it (the premium) is diverted towards the administrative expenses of the insurance company selling the policy and the remaining portion of the premium gets invested.

The Endowment Plan is one of the most popular insurance plans of India now. The objective of the policy is to provide security as well as save money for future .So what is endowment plan? An endowment insurance plan can be perceived in the given way.

Endowment Insurance = Protection + Investment plan

In a layman’s language it can be said that life insurance plans like Term Insurance provide life cover and the benefits are given only at the demise of the person insured. Whereas Endowment insurance plans are meant for savings, as the money accumulated due to payment of premiums can be availed even if the person insured remains alive. Hence endowment life insurance in general costs more. The premium is high because at the Maturity time you will get the Assured amount and the Bonus accumulated for the insurance premium as the profits.

In the event of death of an endowment insurance plan holder during the Term of the policy, the nominee receives the Sum Assured plus the bonus/participating profit/guaranteed additions, if any. The bonus or profit is paid for the number of years that the insured survives in the policy term, so you can see what a good investment plan it is. Endowment plan is a very good option for young people as it offers them an opportunity not only to cover themselves for Risk but also provides financial freedom to them in old age by way of maturity benefit.

If you still have questions on what is an endowment plan and how the various endowment plans work, then read on, the various types of the endowment plans are discussed below:

Unit-linked endowment policy

Unit-linked endowments are those life insurance policies where the premium is endowed in units of a aggregate insurance fund. Units can be redeemed to cover the cost of the life assurance. The insurance policy holders get the option to choose the funds where their premiums are to be invested in and in what proportion. The current unit prices available on newspapers and on the internet on a regular basis and the encasement value of the policy is same as the current value of the units.

Full endowments policy

The full endowment plan is a highly profitable insurance plan where the basic sum guaranteed is equal to the Death Benefit at the beginning of the policy and, if the insured chooses growth option, the final payout would be much higher than the sum assured.

Low cost endowment policy

The main objective of a low cost endowment has been to pay off loans or you can look at it as an investment plan for paying off loan .It guarantees a yearly growth rate but does not guarantee of paying off your loan (for which you might have taken the policy) in full at maturity. The growth assumption rate is used to determine your monthly premium.

In case of profit less than the initial growth assumption, you would have to figure out the funds to cover the shortfall. However, you will be alerted during the term of the life insurance policy if your plan looks insufficient to cover your goal, in which case you can increase your monthly premium.

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