Endowment policy

What is an endowment policy?

An endowment policy is a life insurance contract that combines protection with saving. The insurer pays a benefit if the life assured dies during the policy term, and pays a maturity benefit if the life assured survives to the end of the term. Either way the policy pays out once, which is what separates an endowment from term insurance, where survival usually earns nothing.

An endowment can be participating, where the policy shares in the insurer's surplus through bonuses, or non-participating, where the benefits are fixed in rupees at the start. Endowments are the classic "traditional" plan in India and form a large part of LIC's book and of the savings business sold through agents and banks.

How an endowment policy works in India

Endowments are non-linked products governed by the IRDAI (Insurance Products) Regulations, 2024 and the Master Circular on Life Insurance Products of 12 June 2024. The rules that matter most, as of October 2026:

• Minimum term. An individual savings product must have a policy term of at least five years.
• Minimum cover. For regular and limited premium plans, the sum assured on death must be at least 7 times the annualised premium if the entry age is below 50, and 5 times at 50 and above. The death benefit can never be less than 105% of the premiums paid to date.
• Positive return. Survival and maturity benefits from a savings product must give the policyholder at least a non-zero positive return.
• Par design. In a participating endowment, the maturity benefit should closely reflect the policy's asset share. Regular (reversionary) bonuses are declared once a year, and a terminal bonus may be paid at maturity or on death.
• Non-par design. The benefits must be stated as absolute amounts at inception, with no discretion left to the insurer. Some non-par endowments add "guaranteed additions" each year, which are also fixed in advance.
• Surrender value. From 1 October 2024, a regular premium endowment acquires a guaranteed surrender value once two consecutive years' premiums are paid, and a special surrender value becomes payable after the first full year's premium. The customer gets the higher of the two. See surrender value.
• Loans. Every non-linked savings product that has a surrender value must offer a policy loan.
• Illustrations. Where benefits are not fully fixed in rupees, the benefit illustration must show outcomes at gross investment returns of 4% and 8% a year, and must be signed by the customer and the seller.

Example: minimum guaranteed surrender values

Take a regular premium endowment with an annual premium of ₹50,000 and a 20-year term. The guaranteed surrender value cannot be lower than the following share of total premiums paid (less any survival benefits already paid), with the surrender value of any attached bonuses added on top:

Insurers may pay more, and the special surrender value often exceeds these floors in later years. The table shows why early exit from an endowment is costly: in the first few years the customer gets back well under half of what was paid.

Tax treatment

Maturity proceeds of an endowment are tax-free only if the policy meets the tests in what was section 10(10D) of the Income-tax Act, 1961: the premium in any year must not exceed 10% of the sum assured (for policies issued from April 2012), and for policies issued on or after 1 April 2023, the aggregate annual premium across such policies must not exceed ₹5 lakh. Death proceeds remain exempt. The Income-tax Act, 2025, which took effect on 1 April 2026, carries these conditions forward under new numbering. See Section 10(10D).

What an endowment policy means for distribution

Endowments are easy to pitch and easy to mis-sell, and both facts shape how they are sold.

• The "safe savings" pitch. Customers who distrust markets like the idea of a guaranteed or bonus-backed lump sum. The adviser has to explain that the effective return on a traditional endowment is usually modest once the cost of cover is taken out, and that it pays only if the policy is held to the end.
• Illustration discipline. Showing only the 8% column, or quoting a past bonus rate as if it were promised, is a common source of complaints. The signed 4% and 8% illustration, and the Customer Information Sheet given with every policy, are the documents a seller will be judged against later.
• Surrender economics. The 2024 surrender rules raised what early exiters get. Insurers responded by refiling their bestsellers from October 2024 and reshaping distributor pay: LIC, for example, cut first-year commission on revised plans and raised renewal commission, while several private insurers linked payouts to persistency through deferral or clawback. Sales teams should know their insurer's current commission structure, not the one from before the change.
• Persistency is the real test. An endowment that lapses in year two is a loss for the customer, a lost renewal stream for the agent and a weak persistency ratio for the insurer. A sale that the customer cannot afford for the full premium paying term is not a good sale.
• High-ticket buyers. The ₹5 lakh premium limit for tax-free maturity changed the pitch for wealthy customers. Above the limit, the maturity gain is taxable, so the comparison with other investments has to be made after tax.
• Regulatory direction. IRDAI's September 2026 consultation paper on distribution economics names selling a regular premium plan without explaining the cost of discontinuing it as an example of mis-selling, and proposes commission clawback where a sale is found to be mis-sold. As of October 2026 these are proposals.