Endowment Policy is essentially a life insurance policy which, apart from covering the life of the insured, helps the policyholder save regularly over a specific period of time so that he/she is able to get a lump sum amount on the policy maturity in case he/she survives the policy term.
Types of Endowment Policies
- Traditional with profits Endowments: This policy assures a sum of money that will be paid at the time of maturity or death of the policy holder. The amount of the policy increases as the policy holder gets regular / reversionary bonuses. These are guaranteed bonuses that the policy holder receives. In some cases, a non-guaranteed bonus known as terminal bonus may also be paid at the expiration of the endowment policy.
- Non profit Endowment Policy: In non profit endowment policy, a lump sum amount is promised to be paid at the time of maturity or on death of the policy holder whichever is earlier.
- Low Cost Endowment Policy: This policy is a combination of traditional with profits endowment, where estimated growth rate will meet the mortgage amount and reducing term assures that the target mortgage amount is paid as minimum in case policy holder dies. If the sum has risen at a particular rate then the amount will be enough to pay the outstanding loan. But in case the bonus rate falls, there is no guarantee that the return will be sufficient to meet the outstanding mortgage.
- Unit Linked Endowment Policy: There is no fixed amount promised at the time of policy maturity in this policy. The time period of policy and mortgage period are equal. The premiums are used for investment in units of policy holder's choice. The maturity value of the policy depends upon performance of the units and there is no surety that the returns would be enough to repay the loan.