Until recently, endowment insurance plans were the most popular form of life insurance. With private companies now offering insurance, Unit Linked Plans (ULIP) have slowly grown to be popular with customers.
ULIPs account for around 90% of the new insurance policies sold by private insurance companies. However, endowment policies still form a major part of the insurance policies sold by the Life Insurance Corporation of India. Here are some things you must understand about endowment policies if you are thinking of buying one:
- An endowment policy is a combination of insurance and investment. In this, the life of policyholder is insured for a certain amount. This life cover is referred to as the sum assured.
A portion of the premium is allocated towards this sum assured while some is allocated towards the administrative expenses of the insurance company selling the policy. The remaining amount is invested.
- The amount invested generates a certain return annually. Hence an endowment policy includes an annual bonus. The bonus is typically generated as a certain proportion of the sum assured or life cover.
- The bonus that is declared thereafter is not immediately payable. In the case of a stock dividend or a mutual fund dividend, which is payable right after it is declared, the bonus is payable once the policy matures or in case the policyholder dies.
- In an endowment policy the bonus is only accumulated and does not compound. Let us take the case of a 35 year old individual who takes a policy with a sum assured of Rs. 10 lakh with a term of 20 years. The premium for this would be around Rs. 49,000 per year. At the end of the first year, the insurance company declares a bonus of Rs. 50 per thousand of sum assured or 5% of the sum assured. This amounts to Rs. 50,000, which remains Rs. 50,000 for the next nineteen years till the end of the policy. The same thing happens to the bonuses declared for the remaining period of the policy as well.
- Chances of an insurance company declaring an average bonus of more than 5%, over a period of twenty years, are very less. This is primarily because endowment policies largely invest in government securities. Also taking into account the administrative expenses of the insurance companies, a greater bonus is highly unlikely.