How does endowment work?
An endowment is a savings plan that creates a fund for a particular purpose. The purpose is usually a responsibility we have as adults. This could be your children’s higher education, wedding, or retirement.
An endowment fund can be created through Mutual Funds, Post Offices, Banks, and Insurance.
An Endowment Insurance policy is essentially a life insurance policy which apart from securing the policyholder’s life, helps them save money regularly. The lump-sum money given at maturity is guaranteed despite the death or survival of the policyholder. Hence, the purpose of saving will always be fulfilled no matter what.
Insurance is a unique way of saving, all your money is given to you or your family members on death or if you survive too.
Experts say endowment insurance is a must for all individuals who have certain responsibilities to fund that are inevitable.
Usually, people separate the terms insurance and investment, although some experts think a bit differently.
For instance, your child’s higher education is something that you would want to pay for no matter what. To sponsor your child, you cannot risk putting your money in the market.
Say, you invested in mutual funds and in the year 2020, your child would require that money for his education and while this year being your fund's maturity, the amount of money you have collected in these 20 years, would be considerably less than you saved since the COVID19 pandemic has caused a downfall in the market
However, this would not happen if you have an Endowment insurance policy where rates are not dependent on the market. Your child would get the entire money for his education in 2020.
How big of an endowment plan do I need?
If you are married with 2 children, approximately 1 core would be sufficient for the responsibilities you have i.e. higher education for 2 children (extra if it is overseas), retirement, wedding, and an emergency health fund.
And for this, you would need approximately 2 to 2.5 lakhs for the next 30 years.
Is an endowment plan a good investment?
Yes, an endowment plan is a good investment that guarantees to pay you a lump sum at survival or death. Ideally, 30% of your wealth creation should be endowments and 70% can be investments through any other instruments.
For instance, you have invested Rs 100 in endowment insurance, Rs 15/20 goes in purchasing the insurance. The remaining interest is 4.78 out of which 10% goes to the insurance provider and the balance 4.4% will come to you. (which is tax-free)
Although, If you have invested Rs 100 in mutual funds, you will receive a 6% interest out of which 1.8 is taxable. Which leaves you to 4.2. Hence an endowment plan is a good investment that promotes regular saving.
Tax Benefits of endowment plan
The Government of India allows tax benefits for endowment plans in two ways -
- 30% of tax rebate
- The money you will get on the death of survival will be tax-free.
This helps you save tax at the time of inception of the policy, accumulation stage, and also the maturity stage.
Demerits of endowment plan
Return is comparatively less
Merits of endowment plan
These plans encourage compulsive saving, and if you don’t the policy will lapse.
How do we calculate the Surrender value?
After 2 years of paying a premium, the Surrender Value starts. In the initial years, the value is less and after the 2nd year, you can see it rising.
You also have the option of taking a loan too, you can take a loan of 90% of the surrender value and continue the plan.
Is there any capping on expenses in Endowment by IRDA?
Yes, there is, it cannot exceed more than 15% of the premium paid, if Rs 1 lakh premium is paid, 15% of Rs 1 lakh will be the limit of your premium.
PS - There is an option of paying a limited premium too. For instance, your product is a 20 years risk cover, the approximate timeline premium to be paid is only 6 years.
Pro Tip- Whenever you buy Endowment insurance, the payment mode should always be annual, as otherwise you might just make losses as the return you get is less.
For instance, if you pay a 100 Rs annual premium, monthly, then you will be paying 108, (8 Rs extra for a product that gives you only 4% interest) and quarterly - 106, half-yearly -104. So make sure the mode is always annually.
In an endowment plan when we opt for a premium offset option, will the sum assured be impacted?
It will not have an effect on the Sum assured, usually this plan is offered by very few companies in India where the Sum assured is usually increasing.
Which endowment plan is necessary?
A children's endowment plan
- Premium weaver, if the father dies, the child will get a death cover and the future premium is waived off.
- Regular income is given for the child’s livelihood.
- And when the child is 18 or 20, maturity money is given, it can also be given in installments.
Hence, A child endowment plan is necessary!.
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