What You Should Know Before Buying an Endowment Plan
Mumbai, October 23, 2022
Saving money and parking it in the right financial products is an important habit if you are looking to fulfill certain financial objectives in the future. If you save a small amount regularly in the present, it accumulates into a large corpus in the future, given that it is allowed to grow. The best thing is that your money also enjoys the benefits of compounding. So, you receive returns not just on the principal amount but also on the interest gained previously on the principal amount. Another important financial product many experts swear by is a life insurance policy. It ensures the future of your loved ones when you are no longer around to take care of them financially.
If you are looking to tick off both aspects - savings and life cover - at once, an endowment policy may be the right option. Here’s how an endowment plan works and what you should know before you buy one.
How does an endowment policy function?
The premium of an endowment policy is not used completely for the life coverage corpus, as in other types of policies. Rather, one part of the premium is parked in low-risk instruments that are meant for saving purposes. Over the course of time, as you make regular premium payments, this amount increases and amasses into a considerable corpus by the time of policy maturity. If you outlive the maturity of the policy, you receive this corpus as a lump-sum payout. You can use this amount as you deem fit.
In the event of the policyholder passing away before the policy matures, the beneficiaries, as stated in the policy, receive the life cover amount. This can act as an effective financial resource for the beneficiaries, especially if they were economically dependent on the policyholder.
As this policy provides dual benefits, it may have a higher premium as compared to a regular term plan. You can get an idea of the same with the help of a life insurance calculator.
What to know before buying an endowment plan
· The exclusions of the policy
Like any other life insurance policy, an endowment plan has some exclusions on its coverage as well. If the policyholder passes away in a manner specified under the ‘exclusions’ category, the beneficiaries may not receive the sum assured. For instance, any death due to substance or alcohol abuse, participation in risky or illegal activities, self-injury, and so on, is not covered by most policies. Thus, before you sign the policy document, read through the exclusions. It is advisable to opt for a life insurance policy that has fewer exclusions as that ensures you receive more comprehensive coverage.
· The options for premium payment
Endowment plans are accessible policies. Even if you are not able to save some amount for your policy on a monthly basis, you can opt for an endowment plan. For this feature, you must ensure that the insurer/plan you choose offers multiple premium payment options. You should be able to pay either on a monthly, quarterly, half-yearly, or yearly basis. You can also opt for a single, lump-sum premium payment on your endowment policy.
· The right tenure for the plan
If you have sought a savings plan, then you must have some goal towards which you are saving the money. Before you go ahead with an endowment plan, figure out how far the goal is from the current year. Do you want to buy a car in the next 7 years? Or is sending your daughter abroad for higher education after 12 years your most important objective? Choose a policy tenure such that you receive the pay-out as the time duration for that goal comes near. This way, you are prepared to meet your financial objectives at the right time.
· The tax benefits you can enjoy
As per current tax laws (which are subject to terms and conditions and may change from time to time), the premiums of any life insurance policy are eligible for deductions up to Rs 1.5 lakhs, under Section 80C of the ITA, 1961. The maturity benefit amount is also tax-exempted to a certain extent, under Section 10 (10D).
When you are mindful of different aspects of any financial product, you make informed decisions. The points mentioned here can help you choose the right endowment plan for yourself and your family. Alongside, you must also use the life insurance calculator to check how you can reach the right balance between the coverage and the premium.
(Disclaimer: This is branded content. Readers are advised to exercise due diligence and discretion before entering into any correspondence, investment, purchase, business dealings or any other decision on the basis of this content.)