scorecardresearchIs an endowment policy right for you? Here are some factors to consider

Is an endowment policy right for you? Here are some factors to consider

Updated: 04 Apr 2023, 09:08 AM IST
TL;DR.

Endowment policies are a type of life insurance that combines investment and insurance, however, they are more expensive and offer lower returns than other policies. It is important to consider various factors when deciding on an endowment policy.

An endowment policy is an investment product offered by insurance companies that combines life insurance with an investment component.

An endowment policy is an investment product offered by insurance companies that combines life insurance with an investment component.

Insurance is an important financial tool that helps us to protect ourselves from financial losses and uncertainties. In today's world, where risks are increasing, the need for insurance has become even more important. Insurance provides financial security and helps to protect against unexpected losses due to death, illness, accidents, theft, disaster, or any other unforeseen event.

Among the different types of insurance plans available in the market, an endowment policy is one such plan that offers a dual benefit of investment as well as insurance coverage. In this article, we will discuss endowment plans in detail.

What is an endowment policy?

An endowment policy is an investment product offered by insurance companies that combines life insurance with an investment component. It is a long-term contract that offers a guaranteed payment at the end of the term, or when the policyholder passes away. The policyholder pays regular premiums into the policy and the insurance company invests the money in stocks, bonds, or other investments.

The policyholder is guaranteed to receive a payment at the end of the policy's term, which is typically 10-20 years. Endowment policies provide a way for individuals to invest a lump sum or regular payments over time and receive a guaranteed return.

Sharing his views, Ashish Lath, Business Head of InsuranceDekho said, “Choosing an endowment insurance policy is a win-win situation; it combines investment plans and insurance. An endowment policy can either give guaranteed returns or the returns as per the market performance in a lump sum, it depends if one chooses a guaranteed traditional endowment policy or unit-linked (ULIP). However, before opting for an endowment policy, it is crucial to assess your financial goals and requirements to ensure that it aligns with your long-term financial plan.”

Before going for an endowment policy, there are certain important factors one must take into consideration. Let us discuss them in detail.

Factors to consider before buying an endowment policy

Costs

Endowment policies can sometimes be more expensive than other life insurance options, such as term life insurance. The higher premiums and longer terms require a larger financial commitment than other policies. This makes them difficult to afford for many people.

Additionally, the long-term nature of endowment policies means the cost of the policy can be high over time. For this reason, those considering an endowment policy should ensure they understand its costs and benefits before making a decision.

Returns

Endowment policies provide a lump sum payment after a certain period of time but usually offer lower returns than other life insurance policies. While this may be beneficial for providing some financial security, endowment policies are not ideal for individuals seeking higher returns as they usually offer only a modest return on investment.

Furthermore, the returns are fixed and cannot be adjusted to take advantage of market conditions, which reduces their potential for growth. As such, endowment policies are best suited for those looking for a modest return on their investments with some degree of security.

Coverage

Endowment policies often have limited coverage, meaning they may not offer enough financial security to the policyholder’s family in the event of death. This is because endowment policies typically have a lower death benefit than other life insurance policies. To protect the policyholder’s family, it is important to ensure the coverage offered is sufficient to cover their financial needs in the event of death.

It is also important to review the policy regularly to ensure it is providing the desired level of protection. Taking these steps can help ensure the policyholder’s family is properly taken care of in the event of his/her untimely death.

Surrender value

Endowment policies are a type of life insurance that provides policyholders with a lump sum upon maturity, usually after a fixed period of time. However, they come with a disadvantage; the surrender value of an endowment policy is typically lower than that of other life insurance policies.

This means that if a policyholder needs to terminate their policy before the end of the term, they will receive a lower amount than what was originally paid in premiums. This can be a great inconvenience to policyholders who may be in need of the funds before the policy's maturity date. Endowment policies can therefore be a risky investment for those who are uncertain of their financial situation in the future.

Endowment policies sometimes may offer more coverage than term life insurance policies, however, they come at a higher cost. It is important to consider all options when deciding on a life insurance policy and weigh the benefits and drawbacks of each option.

 

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First Published: 04 Apr 2023, 09:07 AM IST