Understanding Endowment Policies: Are They Right for You?

So, is an endowment policy a smart investment? Is it the right way forward for you? Should you explore other options? Well, to decide whether an endowment policy suits your financial goal, it is crucial to understand the policy in detail. Let’s begin. 

What is an Endowment Policy? 

Endowment policy is a blend of life insurance and savings elements. Being essentially life insurance, the policy also provides a lump-sum maturity benefit if the life assured survives the policy tenure. However, if the assured dies during the policy tenure, the nominee receives a complete death benefit.  

So, a single policy gets you life insurance coverage while also letting you save for the future at the same time. For a deeper understanding, let's go through the pros and cons of an endowment policy: 

1. Pros of Endowment Policy 
2. Provides life insurance coverage to the insured for a long time 
3. Promises guaranteed returns upon maturity 
4. Tax benefits up to ₹1.5 lakhs under Section 80C on the premiums paid 
5. Tax benefits under Section 10(10D) on the maturity and death benefit 
6. You may also be eligible to borrow a loan against the surrender value of the policy 
7. It builds a habit of regular and disciplined savings 

Who Should Invest in the Endowment Policy? 

Deciding investments and insurance plans can be tricky at times. However, we'll help you break down the details for more clarity. Here are some of the factors that may influence you to purchase an endowment plan: 

1. Regular income: A must 

Endowment policies require regular premium payments. So, having a regular and stable income is a must for anyone planning for an endowment plan.  

2. A plan with risk-free investment 

If you are looking for a risk-free investment, an endowment plan can be a good choice. While the rate of returns is low, these are also risk-free and can provide a good corpus upon maturity. 

3. A tax-saving policy 

An endowment policy provides tax benefits as well. So, someone planning for life insurance that lets you save big on tax can choose endowment plans. It offers tax benefits of up to ₹1.5 lakhs under Section 80C of the Income Tax Act of 1961. The maturity benefits can also fetch you tax exemptions under Section 10(10D). 

4. Consider the lock-in period 

Before investing, make sure to check the plan's lock-in period. Until the lock-in period ends, you may not be able to withdraw/ surrender the policy. So, it is essential to have sufficient emergency funds with you. 

5. There is no flexibility in premium payment 

Unlike mutual funds, where you may skip instalments, or stop paying when you want, endowment plans do not let you skip premium. You need to pay regularly. So, you also need to consider these factors before purchasing. 

6. Ready to pay a high premium 

Compared to various other policies like term insurance, the premium of endowment plans is higher. To get a better idea, you may create a detailed budget of your income and expenses to understand whether you are ready for an endowment plan or not. 

Endowment Policies: Things You Should Keep in Mind 

Listed below are a few things to keep in mind when opting for an endowment plan: 

1. Usually, endowment plans have a lock-in period, before which you cannot surrender the policy 
2. The rate of returns upon maturity is generally low compared to various other investment options 
3. Compared to term insurance life insurance, endowment policies have higher premiums 
4. The death benefit alone may not be sufficient to cover the financial needs of the family for very long. One may need additional life insurance coverage/ investments as well.