Endowment Insurance Policy
A principal life insurance product is an endowment assurance policy, under which the death benefits are paid in return for premiums paid by the insured. The endowment policy serves to replace a number of individual policies, providing a safety net against failing investments and the loss of retirement earnings. These policies pay out endowments to named or designated beneficiaries upon the policy holder’s death. The key features of these policies are that they afford the death benefit and premium payment options to named or designated beneficiaries upon the policy holder’s death.
An endowment assurance policy provides three essential features. First, it offers the premium payment and death benefits at the end of the policy period in exchange for a fixed sum assured. Second, it offers a guaranteed minimum return on your endowment. Finally, it offers you flexibility in setting the level of your return. In addition, it guarantees that your loved ones would receive a certain amount as the value of your endowment in the years following your death.
The endowment assurance policy is usually offered by life insurance corporations that are fully managed by professional investment advisers. Under this arrangement, the insurance company issues such a policy on your behalf and pays the premium on a monthly basis. The insurance company pays the death benefit in the form of a lump sum.
Generally, these types of policies come under non-qualified endowment assurance policy, also referred to as NCE. The reason behind the name is the fact that the premiums are paid only after the death of the policy holder. Unlike the qualified plans, the NCE does not require a medical examination and does not require the submission of additional bonuses. This makes the policy eligible for tax holidays. It is recommended to choose the NCE over the qualified plans when there is no need for additional bonuses or to increase the benefits covered in the plan.
There are two distinct provisions under which you can reap tax benefits from your endowment assurance policy. One is the standard rate of interest and the other is the special tax benefit. The standard rate of interest refers to the rate of interest that is applied for your policy. For the special tax benefit, this refers to the tax benefits extended to the beneficiary. Both these provisions are discussed below.
The standard rate of interest applies to your endowment assurance only if you maintain a regular monthly repayment scheme. In case you do not repay your loan for a minimum period of time, the interest on the loan starts accruing. As soon as it starts accruing, you can claim the tax benefits. However, the standard rate of interest applies to the entire period of loan repayment. The period of loan repayment can be deducted for income tax purposes. Under the tax laws, the standard rate of interest cannot be claimed for the first five years of loan repayment.
On the other hand, the special risk cover is a kind of insurance policy, provided on the basis of your endowment assurance. This is a very valuable supplement to the life insurance policy. If you invest the bonus amounts that are equivalent to the face value of your assurance policy in a different life insurance policy, you will enjoy long term benefits without any restrictions. The life insurance policy can be used for paying the premiums even during your retirement period.
The endowment plan matures after a specific period of time. The maturity benefit of the endowment plan is not taxable. Similarly, the tax benefits depend solely on the investment in the insurance plan and not on the maturity benefit. Any investment in the endowment policy after the maturity benefit is fully taxable.