Endowment policy

An endowment policy bundles two things into one premium: life cover and a savings account run by the insurer.

The premium is the same every year. If the insured survives the term, the insurer returns the investment portion along with the returns actually realised on it — declared each year as an accrued bonus but paid only at the end. The maturity payout is the sum assured plus any accrued bonus. If death occurs during the term, the sum assured plus the bonus accrued to that date is paid to the nominee.

The bonus is not promised at outset. It is calculated at the end of each year, and the workbook is careful to say that the illustrated return is not guaranteed.

Because the two functions are bundled, the only honest way to judge an endowment policy is to separate them again.

Take the premium for the endowment policy and the premium for a pure term plan of the same sum assured from the same insurer. The difference is what the client is paying for the investment. Run that difference against the maturity value using the RATE function in Excel where the payout is a lump sum, or XIRR where it arrives over time, and you have the inherent investment return.

The workbook is unambiguous about what that number usually looks like: typically around 3-5% a year, and even that is not guaranteed. The official illustration on the insurer's website is the only document that separates the guaranteed portion from the non-guaranteed one.

Taxation of the maturity proceeds turns on two thresholds:

• For policies taken after 1 April 2012, the maturity proceeds are exempt under section 10(10D) only if the premium payable for any year does not exceed 10% of the sum assured.
• For policies taken on or after 1 April 2023, if the premium — or the aggregate of premiums payable over the term — exceeds Rs 5,00,000, the maturity proceeds are taxable as income from other sources, even if the sum assured is ten times the premium or more. The aggregate premiums paid, to the extent not already claimed as a deduction, are allowed against it.

The workbook's real-life comparison. Sum insured Rs 1 crore, tenure 30 years, from the same insurer:

The extra premium being paid for the investment is Rs 3,16,332 − 9,416 = Rs 3,06,916 a year. Solving for the rate that turns 30 such payments, made at the beginning of each year, into Rs 2,14,00,000:

Nper = 30   PV = 0   PMT = 3,06,916   FV = -2,14,00,000
Type = 1 (beginning of period)
RATE = 5% a year

Five per cent, over thirty years, on Rs 92 lakh of cumulative extra premium. Buy the term plan and invest the difference at an assumed 11% and the same Rs 3,06,916 a year compounds to roughly Rs 6.8 crore instead of Rs 2.14 crore — for identical cover.

Now the tax layer. Mr X takes an endowment policy of Rs 60,00,000 on 1 April 2024 with a premium of Rs 6,00,000 a year. The premium is 10% of the sum assured, so the old test is satisfied. But the policy was taken after 1 April 2023 and the premium exceeds Rs 5,00,000, so the maturity proceeds, bonus included, are taxable as income from other sources — after deducting the aggregate premiums paid that were not claimed as a deduction in earlier years.

Chapter 2 (Life Insurance Products) sets out the structure, the accrued-bonus mechanism and the RATE/XIRR method for extracting the inherent return, with the Rs 1 crore comparison above. Chapter 12 (Taxation of Other Products) carries the 10(10D) conditions and the Rs 5 lakh premium rule with Mr X's example. Chapter 19 compares insurance-linked savings against mutual funds. Expect the classic advisory question — term plan plus investment versus endowment — and a tax question on whether a given maturity payout is exempt.

• Two independent tests for 10(10D), and both must pass for a policy taken on or after 1 April 2023: premium within 10% of the sum assured, and aggregate premium not above Rs 5,00,000.
• Exceeding the Rs 5 lakh threshold makes it income from other sources, not capital gains. That treatment is reserved for ULIPs that fail 10(10D) from FY 2025-26.
• Accrued bonus is declared annually but paid at maturity. It is not a yearly payout, and it is not guaranteed at inception.
• Do not compute the return on the whole endowment premium. The comparison is against the pure-term premium; only the difference is the investment.
• A money-back policy is an endowment variant, not a different species — same bundling, same analysis.
• The death benefit is not the argument for the product. A term plan pays the same cover for a fraction of the premium; the entire question is whether the investment leg justifies itself, and at 3-5% it rarely does.