What endowment and riders mean in the world of insurance

Dhirendra Kumar, the chairman of Value Research, has been associated with All India Radio's popular finance program 'Market Mantra' for two decades. It is a weekly show that provides listeners with insights and advice on personal finance, business news and economic developments. During one such show, a listener asked the following question:

In the insurance domain, we often hear two words: endowment and riders. What are they?

While this was answered on the airwaves on a recent Sunday, we thought we'd compose the response for you too:

So let's look at endowment plans first.

There are three types of life insurance policies:

• ULIP (Unit-linked insurance plans)
  
• Term plans
  
• Endowment plans

In short, an endowment plan combines life insurance coverage with a savings component.

For more clarity, let's tell you how it works.

• On buying an endowment plan, you are supposed to pay a premium, typically on a monthly, quarterly or an annual basis. You pay the premium through the policy term.
  For example, if the policy tenure is 20 years, you pay premiums throughout this period.
• In case you don't survive this period, your family will receive a death benefit. A death benefit is usually the coverage amount promised by the insurer at the time of buying the plan plus the accumulated premium amount.
• If you survive the policy term, you receive an assured amount from the insurer, also known as maturity benefit. This amount is basically the accumulated premiums that were invested by the insurance company.

What you should know
On the surface, endowment plans look attractive. Who doesn't like receiving a large fixed amount?

But dig deep and you'd realise that maturity benefits grow slower than even the national inflation rate! In fact, you'll get more returns if you invest in post office returns.

Our take
My general advice is to never mix investments with insurance, and an endowment plan is one such example.

Instead, if you are looking to buy life insurance, go for a good term plan. They are affordable and the premiums are low.

And if you are looking for investments, opt for a good mutual fund, fixed deposit, shares, or bonds.

What are riders?
Now, let's understand what riders are.

Every insurance policy - be it life or health policy - comes with a rider, such as a critical illness rider, disability rider, accident rider and so on.

Let's say you buy a health policy with a critical illness rider. Later, if you are diagnosed with a critical illness, the insurance company will foot your medical bills.

If you buy a life policy with a critical illness rider, you'd receive a higher maturity benefit on surviving the policy duration.

This article was originally published on August 11, 2023.