An endowment policy is a combination of insurance and investment: Endowment policy has typical maturities of ten, fifteen or twenty years up to a certain age limit. The life of the individual taking the policy is insured for a certain amount. This life cover is referred to as the sum assured. Endowment Policy> combines the risk cover with financial savings. Historically endowment policies have been the most popular policy in the world of life insurance. This is because people still consider “endowment plan” as an investment rather than “pure insurance”.

In an Endowment Policy, the sum assured is payable even if the insured survives the policy term; if the insured dies during the term of the policy, the insurance firm has to pay the sum assured like any other pure risk cover. A pure endowment policy is also a form of financial saving, whereby if the person covered survives beyond the tenure of the policy; he gets back the sum assured with some other investment benefits.

An endowment policy may declare a bonus every year: The money that is invested generates a certain return every year. This return may be declared as a bonus. The bonus is typically generated as a certain proportion of sum assured or life cover as it is popularly known. However, the bonus declared does not compound it, only accumulates over the life of insurance; thus, returns are low.

For example- if an individual taking the policy has a policy of sum assured Rs. 20 Lakh and the company declares a bonus of Rs. 10 per thousand of sum assured, then the bonus works out to be Rs. 20,000. Now since this bonus is not compounding every year, it will remain Rs. 20,000 till it is paid out. Hence, you could see a disadvantage here that you are essentially loosing interest on that money. This bonus may accrue to the insurance holder till the maturity or it may be paid out before the maturity as well.

If premium payments are discontinued at any point of time before maturity, the policy continues with a reduced sum assured proportionate to the premiums paid. One can also surrender the policy at any time and get the surrender value, which is usually calculated as a percentage of the premiums paid excluding the first year's premium and all extra premiums. It is therefore not advisable to surrender the policy, as the amount realized will be much lower than the premiums paid.

Different types of Endowment policy
The various types of endowment policy include:

1. Unit-linked endowment: Here the insurance premium is endowed in several units of a specified unitized insurance fund. Moreover, the insurance holders can often select the funds where they want to invest their premiums.

2. Full endowment: It is basically a with-profits endowment in which the basic amount ensured is equivalent to the death benefit from the beginning of the policy. Later, assuming the expansion or growth, the final payout or return would be much higher than the initial sum.

3. Low cost endowment (LCE): A low cost endowment is a blend of a particular investment where an expected future growth rate will meet up a target amount and a declining life insurance component to make sure that the entire target amount will be paid as a minimum if any accident occurs (any kind of physical illness or death).

4. Traded endowment: These endowment policies are also called second hand endowment policies. These are traditional with-profits endowments that have been sold to a new owner part way through their term. The Traded Endowment market enables buyers (investors) to buy unwanted endowment policies for more than the surrender value offered by the insurance company. Investors will pay more than the surrender value because the policy has greater value if it is kept in force than if it is terminated early.