Investing in Endowment Policies vs Investing in Equities
Table of Contents
The terms, Equity and Stock, are used interchangeably although there is a fine line of distinction between the two. Both represent ownership in a company and are available for purchase/sale on the stock exchanges. Equity, in particular, means ownership after debts are cleared off whereas stocks refer purely to those equities purchased/sold in the stock market.
Equity investments are largely done to generate wealth either in the form of capital gains or in value. When equities give capital gains, you get money in the form of dividends whereas a price increase allows you to sell shares at a higher price and profit by keeping the difference. Equities are an important part of a balanced investment portfolio. The exact percentage allocation to equity depends on your age, risk appetite and investment objectives.
Endowment plans are designed to serve multiple objectives like, One, it is a safe investment strategy to build a corpus. Two, it is an insurance policy that gives your family a financial cushion in case of your untimely demise. Endowment plans have a long legacy and are thus trusted by millions of people to save money, protect life and also save on taxes both on investment and during withdrawals.
Endowment plans can be used as a robust, reliable, comprehensive “piggy bank” to save for life goals such as a child’s education or marriage. At the time of maturity, endowment plans give back the guaranteed amount + bonuses + guaranteed annual additions, if any. Moreover, most endowment policies give extended life cover even after the maturity value is paid out. Endowment plans are popular because they offer guaranteed returns, which most risk-averse investors like. The safety net of life insurance means that your family will be financially comfortable if life doesn't go as planned.
Difference Between Equity and Endowment Life Insurance
Both equity and endowment life insurance are part of most investment portfolios. It is therefore important to understand the finer nuances to decide what suits you best and the exact allocation for each.
1. Safety/Risk on Investment
Equity
- Direct Trading: Returns depend on the market performance of that stock
- Mutual Funds: Return depend on the performance of various stocks that form part of the fund. Less risky as compared to direct trading as an investment is spread across stocks.
- ULIPs: Triple Advantage-Keep shuffling allocation between Equity and Debt. Life Insurance cover is also built-in. Generate wealth. Least risky of the three.
Endowment plans
- Guaranteed Returns + Applicable Bonuses + Annual Additions
Insurance + Savings - Safest investment plan
In case of demise, the nominee gets Sum Assured +Bonus
2. Investment Tenure
Equity
- Direct Trading of Stocks: No lock-in or tenure
- Mutual Funds: Generally, no tenure. Equity Linked Saving Scheme (ELSS) has a lock-in of 3 years
- ULIPs: Minimum 5-year lock-in period
Endowment plans
- Depends on the plan and premium paying term
3. Instruments of Investment
Equity
- Direct Trading
- Mutual Funds
- Unit Linked Insurance Plans (ULIPs)
Endowment plans
- Unit Linked Endowment
- Guaranteed Endowment
- With/Without Profit Endowment
- Low-Cost Endowment
5. Emergency Support
Equity
- In case of medical and other personal exigencies, you can opt for partial withdrawals without surrendering the policy. This is possible only in ULIPs
- Life Insurance cover is available only in ULIPs
Endowment plans
- In case of permanent disability, the company pays the future premiums until the end of the term.
- It is dual protection against critical illnesses and death.
6. Purpose of Investment
- Wealth creation through capital gains and dividends
- Profit through fluctuation in market value. Insurance policy, is designed to give superior returns and help create wealth. The money is initially invested in high growth equity funds and gradually moved to safer debt instruments.
Endowment plans
- Stable method to create a corpus
- Guaranteed returns
- Profit-sharing in the form of bonuses
Conclusion
Every person needs a safe investment to fall back on, so that they know this money will be there under all circumstances. Endowment plans provide that safety net by giving guaranteed returns in the long run. This guaranteed corpus forms the base of your investment portfolio to give you and your family financial security.
The subsequent goals should be to generate wealth where ULIPs are conservative yet aggressive because you can change your portfolio allocation depending on your life stages and market movements. Both ULIPs and endowments provide a life cover which makes both solid financial investment options. Direct trading in equities neither gives the flexibility that ULIPs provide nor the guarantee that endowment plans come with.
Also Read: When Should You Start Investing In A Life Insurance Plan For Your Child?
