Endowment policy
Also written Endowment plan · Endowment assurance · Endowment insurance · Endowment life insurance
A life insurance policy that pays the sum assured plus accrued bonus on survival to the end of the term as well as on death — an investment-cum-insurance contract with a level premium.
In plain language
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.
How it works
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.
A worked example
The workbook's real-life comparison. Sum insured Rs 1 crore, tenure 30 years, from the same insurer:
| Endowment | Pure term | |
|---|---|---|
| Annual premium | Rs 3,16,332 | Rs 9,416 |
| Payout on survival | Rs 2,14,00,000 | nil |
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.
Why NISM asks about it
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.
Common exam traps
- 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.
Check yourself
1.According to the workbook, for the same amount of investment, which combination will invariably beat the ultimate return from an endowment life insurance product?
- a)A term policy plus investment in Public Provident Fund
- b)A money-back policy plus investment in a bank fixed deposit
- c)A unit linked insurance plan plus investment in equity mutual funds
- d)A whole life policy plus investment in National Savings Certificates
Show the answer
Answer: (a) A term policy plus investment in Public Provident Fund
The workbook states that the ultimate return from investing the same sum of money into buying a TERM POLICY PLUS INVESTING IN PUBLIC PROVIDENT FUND will INVARIABLY BEAT the ultimate return from buying an ENDOWMENT life insurance product for the same amount of investment.
Both routes attract the same deduction, so the tax argument cannot rescue the endowment policy. The cure for the bias is to highlight the need for adequate PURE insurance products and the POOR RETURNS from investment cum insurance products compared with equivalent investments combined with pure insurance plans.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Accrued bonusThe bonus a participating investment-cum-insurance policy earns each year after its guaranteed-bonus period ends — declared annually at the insurer's discretion but paid only with the sum assured, at maturity or death.
- High value ULIPA ULIP issued on or after 1 February 2021 whose aggregate annual premium exceeds Rs 2,50,000, loses the Section 10(10D) exemption and is instead taxed as a capital asset, at 12.5% long-term or 20% short-term.
- Term insuranceLife cover for a fixed period: if you die during the term your nominee receives the sum assured, and if you survive it nothing is paid back. It is the cheapest way to buy protection.
- Whole life insuranceA type of life insurance policy that stays active for as long as you keep paying the premiums, rather than for a fixed term like term insurance.
- Surrender valueThe amount an insurer returns when a policyholder discontinues an investment-cum-insurance policy early — at least 30% of premiums paid under the workbook's rules, rising to 90% near maturity.
- Paid-up policyAn investment-cum-insurance policy that continues without further premiums after the policyholder stops paying, with the sum assured cut in proportion to premiums paid versus premiums due.
- Discontinuation policy fundThe fund a lapsed or surrendered ULIP's balance value moves into during the 5-year lock-in, once the capped discontinuation charge is deducted — insurance cover stops, but the money stays locked until the lock-in ends.
- Health insuranceInsurance that covers an insured person's medical and surgical expenses, regulated in India by the Insurance Regulatory and Development Authority of India (IRDAI).
- Sum assuredThe amount a policyholder chooses when buying a life insurance policy, paid to the nominee if the insured dies during the policy term — the figure a term insurance plan promises in full.
- Unit Linked Insurance PlanA life insurance policy in which the premium, after the cost of risk cover and expenses, is invested in equity or debt funds chosen by the policyholder, so the maturity value is the fund value.
- Variable Insurance ProductA life insurance policy that credits the investment part of the premium to a policy account earning a defined minimum floor rate plus any index-linked or bonus additions; minimum term 5 years, lock-in 3.
- Level premiumA term insurance premium that stays the same every year for the whole of the policy term, as distinct from one that increases as the insured gets older.
- Minimum sum assured ruleThe IRDAI requirement that a life policy provide a minimum sum assured of 10 times the annual premium below age 45, 7 times above 45, and 5 times where the term is under 10 years.
- Survival benefitThe life insurance benefit paid when the insured survives a specified period - the half of a policy that a pure term plan does not have, and the reason an investment cum insurance policy costs more.
- Term insurance with return of premiumA term insurance variant that pays back the premiums at the end of the term if the insured survives - the workbook computes the implied return on the extra premium at 4.61%.