Endowment Plans Explained: Should You Buy One?

An endowment plan combines two distinct financial functions, life insurance and savings, within a single policy. Insurers market these products as a way to build a lump sum for future financial goals while also providing life cover for dependants. For many Indian households, endowment plans have formed part of financial planning for decades, often purchased through agents, banks or workplace group schemes.

Here’s endowment plans explained: how they work, what they offer, where their limitations lie and the types of financial situations in which such plans may or may not align with an individual’s stated goals.

What is an Endowment Plan?

An endowment policy is a savings-linked insurance policy with a defined maturity date. The nominee obtains the sum assured and any bonuses earned up to that point if the policyholder dies during the policy period. The policyholder receives the sum assured plus any bonuses declared during the policy period if they live to the end of the term.

In this manner, an endowment plan combines both a savings or investment component and a life insurance aspect into a single contract. This distinguishes it from the following:

• Term insurance, which provides life cover only and has no maturity payout.
• Pure investment products offer no life cover component.

Types of Endowment Plans in India

There are various variations of endowment plans explained, each with unique features, including bonuses, guarantees and payoff schedules. Assessing how a specific policy fits with personal financial objectives and risk tolerance can be made easier by being aware of these differences.

How Endowment Plans Work

When a premium is paid for an endowment plan, it is not directed entirely towards savings or life cover. The premium is generally split across three components:

• Mortality Charge: The cost of providing life insurance cover
• Administrative and Distribution Expenses: Agent commissions and insurer overheads
• Savings or Investment Component: The portion allocated towards generating returns

The returns on the savings component are typically declared as bonuses, of which there are two common types:

• Simple Reversionary Bonus (SRB): Declared annually as a percentage of the sum assured. Once declared, it generally becomes a guaranteed part of the maturity or death benefit.
• Final Additional Bonus (FAB): A one-time bonus that may be paid at maturity or death, based on the insurer’s overall performance over the policy term.

Because part of each premium is used for mortality charges and administrative costs before the remainder is invested, the effective amount working towards savings is lower than the full premium paid, particularly in the earlier years of the policy.

Advantages of Endowment Plans Explained

Endowment plans explained offer several features that may appeal to individuals seeking both protection and disciplined savings.

• Guaranteed Sum Assured: As long as premiums are paid on schedule, the base sum assured under non-participating and with-profits plans is contractually guaranteed, in contrast to market-linked instruments.
• Dual-Purpose Structure: Insurance and savings are combined into a single policy and premium, which some customers find easier to manage than separate products.
• Disciplined Savings: People who might otherwise find it difficult to save consistently can benefit from the fixed, long-term premium commitment.
• Bonus Additions: In addition to the guaranteed sum assured, participating (with-profits) plans may eventually accrue reversionary and final bonuses. Bonus rates are declared annually and not guaranteed in advance.
• Loan Facility: Many traditional endowment policies allow a loan against the policy once it acquires a surrender value, offering liquidity without surrendering the policy.
• Relative Stability: Non-linked endowment plans aren’t tied to equity markets, so the maturity value doesn’t fluctuate the way ULIP or mutual fund investments do.
• Money-Back Variants: These provide periodic payouts during the policy term, which can help meet interim liquidity needs such as milestone expenses.

Limitations of Endowment Plans

Despite their benefits, endowment plans explained also have certain limitations that should be considered.

• Returns: Historical internal rates of return (IRR) on traditional endowment plans have generally ranged from around 4% to 6.5% over 15- to 25-year terms, depending on the insurer, plan type and bonus history. The rate is generally below returns from instruments such as the Public Provident Fund (PPF), which has offered 7.1% per annum as of FY 2026-27 and below long-term equity index returns, though equity returns are market-linked and not assured.
• Life Cover Per Rupee of Premium: Since part of every premium contributes to the savings component, the sum assured for a given premium is lower than under a term plan, where a larger share of the premium funds pure risk cover.
• Liquidity Constraints: Endowment plans are long-term contracts, typically running for 10 to 25 years. Surrendering the policy early, particularly within the first two to three years, generally results in a surrender value lower than the total premiums paid.
• Bonus Non-Guarantee: Apart from the base sum assured and any bonus already declared and vested, future bonus rates are not guaranteed and can be revised by the insurer based on its performance.
• Conditional Tax Exemption: Following the Finance Act, 2023, Section 10(10D) exempts maturity proceeds from traditional life insurance policies issued on or after 1 April 2023 only if the aggregate annual premium across such policies remains within ₹5 lakh. The Section 80C deduction on premiums is also available only under the old tax regime.

Tax Treatment of Endowment Plans

Historically, one of the commonly cited features of endowment plans explained was tax-free maturity proceeds under Section 10(10D) of the Income Tax Act, 1961. This position was revised through the Finance Act, 2023.

What Changed After April 2023

For policies issued on or after 1 April 2023, maturity proceeds are tax-exempt under Section 10(10D) only if the aggregate annual premium stays within ₹5 lakh in a policy year; beyond that, proceeds are taxed as “Income from Other Sources”. This condition applies specifically to high-premium policies; policies with aggregate annual premiums within the ₹5 lakh threshold continue to qualify for exemption, subject to other conditions under the Act. The comparison below highlights differences in life cover and wealth creation.

Source: Finance Act, 2023; Section 10(10D), Income Tax Act, 1961. Death benefits remain exempt regardless of the premium amount paid.

The Section 80C deduction of up to ₹1.5 lakh on life insurance premiums, inclusive of other eligible investments within the same limit, is available only under the old tax regime. Taxpayers who choose the new tax regime do not receive this deduction, which is a relevant consideration when assessing the overall tax efficiency of an endowment plan for a given individual.

Who May Find Endowment Plans Aligned With Their Goals

Depending on individual financial priorities, an endowment plan may be suitable for:

• Risk-averse individuals uncomfortable with market-linked instruments.
• Those who value a guaranteed, though comparatively modest, return.
• Those preferring a single combined insurance-and-savings product.
• Those who benefit from the forced-savings structure of a fixed premium commitment.
• Those who are ineligible for standard term cover due to health conditions must verify their eligibility with an insurer or adviser.
• Those seeking short-to-medium-term assured-return products (5-10 year non-participating variants) can consider options comparable to fixed deposits for this purpose.

Who May Prefer Other Options

In other situations, alternative financial products may be a better fit for:

• Those seeking maximum life cover per rupee of premium, especially if they have significant dependants or liabilities.
• Those comfortable with market-linked instruments and a long investment horizon.
• Those prioritising liquidity and flexibility in accessing their savings.
• This option is for those who prefer to track insurance and investment separately.
• Those under the new tax regime do not benefit from the Section 80C deduction.

Points to Check Before Buying

Whether or not an endowment plan is being considered, the following checks can help in evaluating a specific policy on its merits:

• Ask for the benefit illustration showing guaranteed and non-guaranteed (bonus) portions separately, as required under IRDAI guidelines.
• Calculate or request the IRR/XIRR, rather than relying on the absolute maturity figure.
• Review the surrender value schedule across the policy term.
• Confirm whether the policy is participating or non-participating.
• Assess the sum assured against overall protection needs, including existing cover.
• Understand the applicable tax treatment based on premium and date of issuance.
• Compare the embedded cost of insurance against standalone term insurance premiums for similar cover.

Conclusion

Endowment plans combine insurance and savings within a single contract. Historical IRRs generally range from 4% to 6.5% over long terms, below PPF and long-term equity index returns, though endowment plans explained also offer a guaranteed component and potential bonus additions.

Life cover per rupee of premium is typically lower than under term insurance; liquidity is limited during the term and tax treatment now depends on the aggregate annual premium for policies issued on or after 1 April 2023. Whether such a plan aligns with an individual’s financial plan depends on their existing cover, risk appetite, liquidity needs, savings discipline and tax regime. Reviewing the policy document, benefit illustration and IRR against available alternatives can support an informed decision.

FAQs

1.     What exactly is an endowment plan and how does it differ from term insurance?

An endowment plan combines savings with life insurance: the nominee gets the sum assured on death during the term or the policyholder gets the sum assured plus bonuses at maturity. Term insurance offers life cover only, with no maturity payout, generally at a lower premium for the same cover.

2.     Are the returns from endowment plans guaranteed?

The base sum assured is generally guaranteed if premiums are paid on time, but the bonus component, often a large part of the maturity value, is not guaranteed and is declared annually based on insurer performance.

3.     Is the maturity amount from an endowment plan tax-free?

For policies issued before 1 April 2023, maturity proceeds are generally tax-free under Section 10(10D), subject to premium conditions. For policies issued on or after that date, exemption applies only if aggregate annual premium stays within ₹5 lakh; beyond that, proceeds are taxed as income from other sources.

4.     What happens if premium payments are stopped midway?

If premiums are stopped before the policy acquires a surrender value, typically within the first two to three years, the policy generally lapses with no payout. After the surrender value is acquired, the policy usually becomes paid-up with a reduced sum assured or can be surrendered. Exiting early in either case usually results in receiving less than the total premiums paid.

5.     Is the “Buy Term, Invest the Rest” approach suitable for everyone?

This approach can work for individuals with financial discipline and a level of comfort with market-linked or fixed-income instruments managed separately from insurance. It may be less suited to individuals who prefer a single combined product, who have irregular incomes or who are not comfortable managing separate investments. The appropriate approach depends on individual circumstances, cover requirements and risk appetite.