Endowment policies: Safeguarding future generations

Taking an endowment plan ensures protection and stability for your loved ones. We explain how they work.

Life is such that it tests one at various points in time. It can be sweet and rosy one moment, and depressing the next moment. But while one may have no control over one’s destiny, one may at least try to wrest some control over how one fares financially during an obstacle.

There are ways to secure one’s finances for the future, so that the family’s dreams may remain on course for successful fruition! We refer to a useful insurance product known as the ‘endowment policy’. Read on to know how it can help one realise their loved ones’ goals with not much expense in the present moment.

Understanding endowment insurance

An endowment life policy is a policy that has the dual benefit of life protection as well as regular savings to grow your wealth for the future. It encourages and rewards the savings habit by helping the policy holder create a large corpus of money over a period of years. This corpus is given to the policy holder when the plan matures, and it is in reality an appreciation over the money invested through the years.

The premiums paid by the policy holder are split in two parts: one part pays the premium, while the other is invested in equities. This latter component gets capital appreciation and helps pay the bonuses on the policy.

The calculations in endowment policy

When the endowment insurance matures, the policy holder gets the money in the form of a terminal bonus and a reversionary bonus, plus the sum assured. The bonuses are paid annually.

• If the policy has a premium of Rs 21,000 with a Policy term of 25 years and Sum assured = Rs 5 lakh, with the average bonus declared during these years as Rs 48 per Rs 1,000 of the sum assured, it would amount to Rs 24,000 per year.
• Thus, the bonus would be Rs 6 lakh for 25 years. Assuming the plan pays a terminal bonus of Rs 5 lakh (this is an arbitrary number for calculation), the total monies the policy holder gets are Rs 15 lakh. However, the holder has paid premium of Rs 21,000 x 25 years = Rs 5 lakh.
• This means that the endowment plan has given returns at 12% [Total gains/total premium x 100 / Total tenure]

Helping to strengthen the family’s finances

Not only does the endowment life insurance provide life protection, it also gives stable and steady returns over a period of time. The money that comes by way of the plan maturity can fund a variety of expenses, from children’s education to making a down payment for a house. More importantly, it helps keep the family afloat during a financial emergency.