What Are The Risk Factors In Buying Endowment Plans?
Updated On Jul 24, 2022
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An endowment plan is one of the most popular types of life insurance policies in India. It provides policyholders with the dual benefits of insurance protection and long-term savings. Many people prefer buying an endowment plan mainly because of its comprehensive nature. It offers maturity benefits if the policyholder survives the policy term, and in the event of their untimely demise, the insurance company pays the death benefit to the policy beneficiary.
Factors To Consider Before Buying An Endowment Plan
Discussed below are a few vital factors that you must keep in mind.
Insurance Coverage Required
Before you start comparing different endowment plans from different insurance companies, you must take your time to analyse your insurance needs. Generally, many people tend to buy a life insurance policy with a sum assured of Rs. 1 crore.
Although this is a sizeable amount that can help your family meet their regular expenses after you are gone, you must do the calculations and choose a suitable sum assured based on your specific needs. It is best advised to consider your liabilities, the number of financial dependents, family’s lifestyle, etc. and choose a coverage amount accordingly so that the family can be financially independent even in your absence.
The insurance amount must last for a few years until the dependent members become financially independent. If you find it challenging to compute the sum assured amount, you can follow the rule of thumb, i.e., opt for an insurance coverage 20 times the annual income.
Premium Amount
Just as it is vital to choose the right coverage to suit your family’s financial needs, it is critical to select a plan that fits your budget. The premium for the policy must be affordable. There is no point in buying a policy with high coverage and not being able to pay the premium. When you don’t pay the premium, your policy will automatically lapse, and your family will not get its benefits.
Typically, the endowment plans have a higher premium than pure protection plans like a term insurance policy for the same insured. This is mainly because of the investment-cum-savings component associated with an endowment policy.
When you pay the premium for an endowment plan, a part of the premium is invested in different asset classes for wealth generation. Hence, it is paramount that you know the premium payable before buying an endowment plan. The premium must fit within your budget, and you must be able to pay the sum regularly throughout the policy tenure without compromising on your other financial goals and expenses.
Insurance Company’s Claim Settlement Ratio
The primary purpose of buying a life insurance policy is to give your family financial protection. However, the whole purpose will be defeated if the insurance company reject your family’s claim request and avoids paying the policy benefits. Hence, it is paramount that you verify the insurance company’s claim settlement ratio before buying an endowment plan. It indicates the total number of claims the insurer has settled successfully against the number of claims they receive within a specific duration.
Many insurance experts suggest that it is better to purchase a policy from an insurance company with a claim settlement ratio of over 80%. However, many reputed insurance companies in India have a claim settlement ratio of over 90%. A high claim settlement ratio is an indication of the insurance company’s efficient underwriting terms. Buying a policy from an insurer with high CSR gives you peace of mind knowing that your family will get the policy benefits without any hassles when the need arises.
Periodic Payout
Another critical factor to consider while buying an endowment life insurance policy is the provision for periodic payouts. Getting a payout at frequent intervals during the policy term ensures that you can fulfil your short-term financial goals and obligations such as making a down payment for a car loan or prepaying the home loan, etc.
Today, most endowment plans offer period payouts and allow policyholders to choose the payout mode and frequency. For example, some plans provide a payout of 25% of the sum assured after every four years. Make sure that you know about the payout terms before signing the policy documents.
Conclusion
Protection of your family and long-term savings must be an integral part of everyone’s financial planning. And buying an endowment life insurance policy allows you to accomplish both. It is one of the most robust financial tools that enable you to give your family a financial cushion against future uncertainties and achieve your goals.
Also read: Top Insurance Companies That Provide Child Plans In India
