Introduction

All life insurance companies offer endowment plans which have a huge savings and investment component along with life cover.

These plans are not very complicated to understand and many of them give absolute guarantee in terms of returns they provide. This means that they provide fixed returns which are fully guaranteed and hence carry minimal risk.

Suppose you want to invest a sum of Rs. 1 Lakh every year for your child’s education till your child turns 18. And you want to get your money back when your child starts going to college. You can do so by choosing a plan that suits your investment and payout horizons.

Since you buy an insurance plan with a savings component, you get the benefit of life cover too.

These plans are versatile and come with many investment and payout options. You can use the money you get from these endowment plans to buy a house, fund your child’s education or plan your retirement.

Death Benefit

Think of it this way.

You are making payment towards an investment plan. You get the benefit of death cover as well.

If you die while you are still paying the premiums, your family gets the cover amount and your policy ends immediately. This cover amount is usually 11 times of your annual premium.

There is no obligation on your family to pay further premiums and continue the policy.

If you are no more during the payout phase when you are receiving the benefits, your family continues to receive the remaining installments of the benefit. The plan remains intact with the only change that your family receives the benefits instead of you. The amount of benefits and timings of payouts do not change.

Regular Payouts

Once your premium payment term is over, you start receiving regular payouts. These payouts can be yearly or monthly.

In shorter term plans, the payout phase usually ranges from 5 years to 15 years. In longer term plans, the payout phase is 25 years or 30 years.

The payouts which you receive are mostly fixed in nature and fully guaranteed.

Maturity Benefit

Many plans offer a maturity benefit on top of regular payouts. You receive this maturity benefit along with the last installment of your regular payouts.

This maturity benefit is a huge amount and usually comes in longer term plans as return of all premiums paid. Your insurance company adds up all the premiums you paid in the investment phase and gives it back to you as maturity benefit.

Why should you invest in these plans?

You have already invested a large chunk of money in risky investments. Do you want to invest a part of your portfolio in safer instruments?
Do you want to inculcate a habit of saving and investing regularly to build a corpus for your financial future?
Do you want your investment to provide a stable income over a period of time?
There are many investment options such as fixed deposits, public provident fund, post office deposit schemes etc. which provide guaranteed returns for 5, 10 or 15 years. Do you wish to invest in a plan which provides guaranteed returns for 30, 40 or even 50 years?
You have wealth which you want to leave for your next generation. Do you want to create a legacy where your next generation will receive money in the form of regular payouts?
If your answer to any of these questions is YES, you can consider investing in an appropriate endowment plan.

These are good financial instruments which provide you long term, guaranteed, tax free regular income.

Tax Benefits

Buying an endowment plan from a life insurance company also comes with tax benefits.

You get exemption under section 80(C) of the Income Tax Act for all the premiums you pay up to a maximum of Rs. 1,50,000.

You also get the exemption under section 10(10(D)) of Income Tax Act when you receive benefits. The benefits which you receive are completely tax free if your total annual premium towards such plans is less than Rs. 5 Lakh.

Returns on Endowment Plans

Returns offered by any investment product depends on the risk which it carries. Products with guaranteed payouts offer lesser returns.

If you are expecting higher returns on your investment, this product is not suitable for you.

If you are thinking that you should not mix insurance with investment, think again. Here are some points which you can consider.

In India, many endowment plans offer a decent annual return of around 6%. This return is almost risk free since your payouts are defined and fully guaranteed.

Moreover during the payout phase, the payouts which you receive from this investment are exempted from income tax to a good extent. According to section 10(10(D)) of the Income Tax Act, you will not have to pay any tax on the amount which you receive as benefits from your insurance company if your total annual premium towards these plans does not exceed Rs. 5 Lakh in a financial year.

Now suppose you are earning and your income falls in the income tax bracket of 20%. You have invested your money in any fixed income instrument such as a fixed deposit where the income you make is taxable.

Let’s assume that this fixed deposit provides you a return of 6%. You will have to pay an income tax of 20% on this return which will effectively make it a return of only 6%*(1-20%) = 4.80%.

If you invest the same amount in an endowment plan where the returns you generate are tax exempted, a 6% return means exactly 6%. You don’t have to pay any tax on it.

How to choose an Endowment Plan for you?

Insurance plans are very rigid in nature. Dates and amount of premium payment are fixed at the time you buy the plan. Even the dates and amount of payouts are predefined and fixed.

Most likely, you will not be able to alter them after you have already purchased the plan.

Buy a plan only if you are convinced that the plan is suitable for you.

Endowment plans are good for those who are looking for less risky assets to invest in. We recommend you to fully understand the plan and check the returns it provides. Buy it only if these returns are as per your expectations.

Make sure you understand the premium payment term and the payout phase. The premiums which you need to pay and the payouts which you receive should be aligned with your personal financial goals. If you think you need the money once your daughter starts going to college, choose a plan that will start giving you payouts when she turns 18.