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Sowmya Sundar

ENDOWMENT plans are very popular as they serve two purposes — life cover and savings. Under a plain vanilla endowment plan, the policyholder pays regular premiums for the policy term. If the policyholder dies during the policy term, the nominee gets the death benefit — the sum assured and accumulated bonuses. On survival, the policyholder gets a survival benefit, including vested bonus and terminal bonus, if any.

After the entry of private players, a number of innovative variants have been introduced. The features offered, structuring of bonus payments and the riders differentiate the products. This week, we will take a look at the endowment schemes offered by HDFC Standard Life, Max New York Life, ING Vysya Life, OM Kotak Mahindra and Birla Sun Life.

Basic features

The age limit set for entry and exit is very important as it gives more flexibility. Generally, an endowment plan can be taken on a minor too. But ING Vysya and OM Kotak's endowment plans are available only for those above 18. Birla Sun Life Flexi Save Plus and HDFC Endowment Assurance are more flexible when it comes to entry and exit ages. Birla Flexi Save also lets you structure the plan such that it matures it at a particular time.

This allows you to plan for a certain event, or expense, that might occur at a certain age — say, your child's marriage or education. Max New York has two endowment plans, one that matures at age 60 and the other which has a fixed term of 20 years.

Bonus payments

The primary difference lies in the structuring of payments. Some accumulate the bonus and pay it either on maturity or death (reversionary bonus), while others allow you to encash it (non-reversionary). For instance, ING Vysya has variants of its endowment product — Reassuring Life and Powering Life. The first version allows you to encash the bonuses declared from time to time whereas the second declares a reversionary bonus. Bonus declaration depends on the company's investment performance and is not guaranteed.

If the bonus is non-reversionary, companies such as Max New York, offer other bonus payment options. Max New York allow you to use bonuses to offset future premiums, or buy a term insurance policy. You can also choose to use the bonus to increase the sum assured. These are in addition to the encashment and accumulation options. Birla Sun Life allows you to encash the bonus after three years, or accumulate it.

Again, there is a difference in the bonus accumulation. It could be simple or compounded. When bonuses are compounded, not only the bonus amount but also the interest earned on the bonus earns interest.

Therefore, a compounded reversionary bonus generates a higher return on your investment. Most players compound the bonus annually. HDFC is an exception. It pays a reversionary bonus, but it is not compounded.

Another difference lies in the calculation of bonus payments. Some declare it as a percentage of the sum assured, while others declare it on the premiums paid. For instance, Birla Sun Life declares bonuses on premium payments. Bonuses paid on the sum assured will be higher than those declared on the premiums paid. Most players declare bonuses on the sum assured.

Premium payment term

You can either pay premiums throughout the policy term, a limited term or lumpsum (single premium). In Max New York and HDFC Standard, the premiums have to be paid the full policy term. Others, such as OM Kotak and Birla Sun Life, allow premium payments to be made over a limited period and bonuses accrue for the rest of the term.

A limited payment option is suitable for people who have a very short career, for instance — film stars, or people who do not want to carry the burden of premium payment for long.

However, a plan that entails a single premium payment in excess of 20 per cent of the sum assured is no longer attractive. It makes sense to phase out the premium payment so that tax benefits can be claimed in different years.

All insurers allow premium payments to be made at quarterly, half-yearly or annual instalments. Some also collect premiums monthly. In most cases, higher the number of instalments, higher the absolute premium payout.

Loan availability

You can take a loan against the endowment policy after the policy acquires cash value, that is, after three years.

The loan amount will depend on the surrender value of the policy (the amount realised on surrender of the policy).

Rider benefits

You can choose from a wide variety of riders to add on to the basic product at an additional premium for extra protection. The common add-on benefits available are Term Benefit, Critical Illness Cover, Accident Death Cover, Accidental Permanent and Total Disability Cover and Waiver of Premiums. The structuring of the riders is important.

The payout in each rider also differs from player to player. For instance, in the critical illness rider, the number of diseases covered under the rider differs for different players. HDFC covers six illnesses; Birla Sun Life covers four; and OM Kotak 12.

The Permanent Disability Benefit under the Om Kotak's endowment plan adds up to 120 per cent of the rider amount. The payout is made at 12 per cent in the first five years adding to 60 per cent of the rider amount. Another 60 per cent is paid in the sixth year.

A term rider for an amount equal to the basic sum assured can also be appended to the basic plan. In the event of death, the payout will be twice the basic sum assured. Max New York Life offers two riders that are not offered by other players - Term Renewable and Convertible rider and Payor rider.

The former provides additional life insurance for a five-year term. At the end of the term, it gives you an option of either renewing it for another five years without providing any evidence for insurability, or convert in into a permanent whole life or endowment life insurance plan. The payor rider is beneficial if the policy is taken on a minor. If the proposer were unable to pay premiums due to death or disability, the rider guarantees the benefit to the nominee. The choice of riders available and bonus payments are the key to choosing an endowment plan.

(To be continued)

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