When we think about safe investment options many immediately consider fixed deposits (FDs), Public Provident Funds (PPFs), or LIC policies. But what about endowment plans? Does not this option strike your mind? These are life insurance plans that even assist in saving money over time.
They offer a lump sum payout at maturity or to your family members in the case of an untimely demise. If you are someone looking out for steady and secure returns with low risk, this may sound extremely attractive. But is an endowment policy the best investment plan for a risk-free return? Let’s break this down clearly.
- Low-risk investment option
Endowment policies are provided by trusted life insurance companies such as HDFC Life. These plans are considered extremely low risk as your fund is not invested in the stock market. It goes into secure debt instruments.
So, if you are afraid of losing your money due to market crashes, endowment plans give you safety. You’ll always get something back at maturity or in case of death.
- Life cover with savings
Endowment plans combine insurance with investment. This infers if anything unfortunate takes place with policyholder during term of the policy, the nominee gets the sum assured. If the policyholder survives the term, they receive a maturity amount.
So, it provides both protection and savings, which is a win-win for individuals looking for high financial stability.
- Bonus additions
Most endowment plans declare yearly bonuses depending on the profit of the insurer. There are two kinds:
- Reversionary bonus: Declared every year and added to your plan.
- Terminal bonus: This is a one-time bonus at maturity.
These bonuses are not assured but are common in participating in endowment plans, increasing your final payout with zero additional effort.
- Tax advantages
You can claim tax deductions as per Section 80 C of an amount of up to ₹1.5 lakh on the premium you pay.
Additionally, as per Section 10(10D), the death or maturity benefit is generally free of tax. However, to avail this benefit, there is an exception, i.e., sum assured of at least ten times the annual premium must be met. This assists in saving tax while even saving considerable money.
- Disciplined savings habit
As premiums must be paid on a regular basis (monthly, quarterly, or annually), you build a habit of saving over the long term. This disciplined approach is extremely helpful if you struggle to save funds on your own. The policy serves as a forced saving instrument – once you commit, you continue.
- Not impacted by market ups and downs
Unlike mutual funds or Unit Linked Insurance Plans (ULIPs), endowment plans do not depend on the share market. So even if the Sensex dips, your plan continues to grow steadily.
This is particularly helpful for senior citizens or conservative retail investors who cannot afford to take risks with their savings.
- Reduced returns than market associated plans
While endowment plans are very safe, the returns are on the lower end – generally between 5% and 7% per annum. This might not beat inflation over the long term.
In comparison, equity funds can endow 10% to 15% of returns but come with high-risk potential. So, you acquire safety but miss out on higher growth.
- Best for conservative retail investors
If you are the one who prefers safety over high returns, an endowment plan is the best. You avail assured returns, insurance cover and no market exposure.
It is best for salaried, homemakers or retired individuals who are just looking for financial and mental peace.
- Assured maturity benefits
These plans have fixed maturity benefit. This infers you know in advance how much you or your family will get if the plan is continued until maturity.
Unlike market associated plans, the returns are highly predictable, which makes future financial planning easy. It is like knowing you will avail a fixed lump sum amount post 15 or 20 years.
- Lack of liquidity
Once you purchase an endowment plan, your fund is locked in for the full term. Early withdrawals or surrendering the plan for three to five years can result in major losses.
So, if you require funds urgently, this plan might not help. It is meant for long-term financial goals, not exigency expenditures.
- Long-term commitment needed
These plans usually come with a 10 to 20-year term. Skipping premium payments can result in losing the policy benefits.
Hence, you need to be financially disciplined and committed for the entire duration. It is not suitable for those looking for short-term investments.
- Better for goal-based planning
Endowment plans are great for planning specific life goals like your child’s higher education, daughter’s wedding, or retirement.
Since the returns are guaranteed (to a large extent), you can plan your expenses with confidence. It is like a future piggy bank with life insurance built in.
Ending note
Endowment plans offer low-risk, guaranteed savings with the added benefit of life insurance. They are best for those who want a stable return, are not interested in market risk and are okay with going for long-term commitments.
If you are looking for the best investment plan for risk-free returns, particularly for secure savings and life protection, an endowment plan is worth factoring in. However, if your goal is high returns or faster wealth creation, then you might want to explore market associated investments instead.
Your choice must depend on your risk appetite level, financial goals and time horizon. In short, endowment plans are not perfect – but for many, they are the perfectly safe option.