Is Endowment Policy Better Than Fixed Deposits

For most Indian households, fixed deposits are the preferred investment option. According to a study published by the RBI in June 2020, bank FDs account for 53 percent of the average household's financial assets (as of March 2020). Although mutual funds have a long history in India, with the Unit Trust of India being established in 1963, their popularity among regular investors has only developed in the previous 20–25 years. The AUM of mutual funds in India has increased at a CAGR of about 17% over the last 20 years, according to AMFI data. Despite their rapid expansion, mutual funds only account for about 7% of household savings, according to RBI statistics. 

FDs, as the name implies, provide investors with a fixed rate of interest for a set period of time. The length of an FD's contract might vary from 7 to 10 years. Interest on bank FDs is compounded, which means you get interested in the interest that has already been accrued. Let's say a bank pays 6% interest on a three-year fixed-rate deposit (compounding annually). After a year, a deposit of Rs 100 will result in a balance of Rs 106 in your account. In the second year, you'll get 6% on the principal plus interest, or Rs 6.4 on Rs 106. Compounding accounted for the extra 40 paise.

Is Endowment Policy Better Than Fixed Deposits

Here is everything you must know about the distinctions between Endowment policy and Fixed Deposits:

• Coverage Goal

In the event of your death, term life insurance only provides cash assistance to your beneficiaries. To handle your household bills and outstanding EMIs, you might use the money as a supplement to your regular income. If you have dependent family members, purchasing a term insurance policy is a must.

The endowment plan is designed to assist you in saving for your long-term objectives. It offers predictable earnings and meets the requirement for long-term savings. Here's where you can learn more about endowment funds.

• Payout Options

When the assured dies during the policy period, the nominee receives the money assured in a lump sum, equal installments, or a mix of both. The policyholder can choose between a lump-sum, monthly, or a combination of both payout options depending on his or her family's needs.

An endowment plan pays out a lump amount either when the policyholder dies during the policy period or as a maturity benefit when the policy term ends.

• Cover

A pure life cover is provided by a term life insurance plan. It's a straightforward life insurance policy that guarantees a payout if the policyholder dies during the policy period. There is no maturity gain if he lives past the timeframe.

A life insurance and savings option are both available with an endowment plan. In the event that you pass away, your nominee receives the death benefit. You obtain a maturity benefit if you live longer than the insurance term.

• Price

A term plan is less expensive because it does not pay a return and just covers the risk.

An endowment plan, on the other hand, comes with a maturity benefit as well as loyalty bonuses. An endowment policy is more expensive because of these additional characteristics.

• Sum Assured

A term insurance plan has the largest sum assured. This is due to the fact that it solely provides risk coverage, which satisfies your demand for security.

When compared to term insurance, the sum assured in an endowment plan is lower. 

Conclusion

From a risk perspective, this article compared the differences between FDs and mutual funds. Mutual funds are vulnerable to market risks, while FDs offer guaranteed returns. Mutual funds can, nevertheless, be good investment options in a dropping interest rate environment if you understand your risk level and invest accordingly. Mutual funds have a large tax advantage over FDs because of indexation benefits in long-term capital gains taxation. To make informed investment selections, you should assess your financial goals and risk tolerance.

Also read - Common Reasons Why Your Endowment Policy Claim Can Be Rejected

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.