What is an Endowment Plan?

An endowment policy or plan is a type of life insurance policy that combines life coverage with a savings component. This means it provides a lump-sum payout either on the policy's maturity (if the policyholder survives the term) or to nominees upon the policyholder’s death during the term. In essence, it helps build a financial corpus while also ensuring your family’s protection in case of an unfortunate event.

How does an Endowment Plan Work?

• You pay regular premiums for a pre-defined term (e.g., 5, 10, 20 years).
• If you survive the policy term: you receive the maturity amount—the sum assured plus any bonuses declared by the insurer.
• If you don’t survive the policy term: your nominee gets the death benefit (sum assured + bonuses, if applicable).
• The guaranteed payout (sum assured) is fixed when purchasing the policy, and annual bonuses (if any) are added based on the insurer’s profits.
• Some policies allow you to take loans against the policy after a certain period.

Types of Endowment Plans in India

Full/With-Profit Endowment :  Pays sum assured plus bonuses (profit-sharing with insurer).

Non-Profit/Without-Profit : Pays only the sum assured, no additional bonuses.

Unit-Linked Endowment (ULIP) : Combines insurance with market-linked investments; returns depend on the fund’s performance. Also called Market Linked Capital Guarantee Plans

Low-Cost Endowment : Designed to accumulate a specified amount after a certain period, convenient for funding loan repayments.

Guaranteed Endowment : Offers fixed, guaranteed maturity and death benefits; may have lower bonus potential.

Participating/Non-Participating : Participating plans share insurer profits as bonuses; non-participating do not.

Examples: LIC’s New Endowment Plan, Jeevan Anand, Single Premium Endowment Plan, etc.

Pros and Cons of Endowment Plans:

Pros

• Dual Benefit: Provides both savings and insurance protection for your family.
• Guaranteed Maturity: You receive maturity benefit if you survive the term; your nominee gets the sum assured if not.
• Bonuses add to Returns: Some plans add annual and terminal bonuses, increasing your payout.
• Low Risk: Returns are safe and unaffected by market volatility (in traditional plans).
• Loan Facility: You can avail a loan against the policy after a certain tenure, beware of the loan interest rates.
• Tax Benefits: Premiums are eligible for tax deduction under Section 80C; payouts may be exempt under Section 10(10D).

Cons

• Higher Cost: Premiums are typically higher than pure term insurance.
• Moderate Returns: Returns are lower than other fixed returns plans in the market like Fixed Deposits, Debt Funds, Bonds (typically 4–6% IRR in India for traditional plans).
• Lower Life Cover: The effective life insurance amount is usually lower than a term insurance policy with the same premium outgo.
• Lock-In Period: Early surrender leads to lower returns and possible penalties; liquidity is limited.
• Complexity: Bonus structure and benefits can be hard to understand and compare.

Summary:

In short: Endowment plans are best-suited for individuals who want a safe, disciplined way to save for future goals (child’s education, weddings, etc.) while also having some life coverage built-in. 

Currently the rate of returns provided by endowment plans in the market ranges from 4-6%. You are better off taking a term insurance and mix it with debt mutual funds, FDs, or Provident Fund for fixed returns along with Life cover. Always compare costs, benefits, and flexibility before investing. Also read Guaranteed Plans vs Fixed Deposits blog

Regards,

Honvest Team.