Pros And Cons Of Buying An Endowment Policy
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An endowment policy is an extremely intelligent step to take when you are thinking of investing in life insurance. It is a policy that offers you the important life insurance cover that you need, as well as the benefit of long term savings after a certain fixed period – so it is a blend of insurance and a saving scheme.
The time period is typically set between 5 to 20 years, after which, the policy holder can avail of the matured amount. In the event of the policy holder’s death, his or her nominee gets the amount. A regular term life insurance plan benefits only the policy holder’s nominee(s) after his/her demise.
Advantages of Endowment Plans
These plans are criticized for being more expensive insurance investments because of the high premiums as compared to other plans. But if you choose wisely, then you can benefit greatly in the long run.
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Two-in-one Benefit
When you purchase an endowment policy, you get life insurance as well as a savings scheme. At the very beginning, you will be assured of receiving a certain sum once the policy matures, after a time period that has been set by you. The premium that you pay over the years will be further invested into various schemes and bonus amounts which will be added to your credit, resulting in quite a large sum once that time period is over. In case of the death of the policy holder before the policy matures, the nominee receives the amount.
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Tax Benefit
Arguably the best thing about buying an endowment policy is that the matured amount is a tax free, lump sum amount. This is also an investment which is tax free – premium amounts of Rs. 1 lakh or less are not taxable. Also, according to the Income Tax Act, the amount received in the event of the death of the policy holder is also completely free of tax.
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Significant Savings
Many people buy endowment policies as a savings plan for some later event in life, either to fund their children’s further studies, marriage or their own retirement. This is a valuable policy therefore for retirement purposes as policy holders get a substantial amount of money to sustain them in their old age. Also, since the monetary returns of such plans are on the higher side, policyholders are able to get loans against the surety of their endowment policies.
Disadvantages of Endowment Plan
Like any other investment product, ULIPs come with their own set of disadvantages. Here are some of the major negatives that you could notice about a Unit Linked Insurance Plan, which are important to know especially if it’s your first investment.
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Complexity
Since a single endowment plan is both a life insurance cover and an investment, it might be quite a lot to comprehend for new investors. We are used to one instrument having a single focus and purpose and focus, be it savings, investment, or insurance. Plus, the sheer amount of charges involved might intimidate you as well. While being updated with your insurance premiums, you also need to keep track of your fund NAVs and make constant decisions about switching, redirecting, and investing your funds in the right places so as to gain maximum returns out of your endowment plan.
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Costs
Endowment Plans generally have a lot of charges associated with them. In the beginning, these charges are more as they go towards policy administration and other aspects of managing your funds. With time the costs increase and your potential returns increase. However, it takes patience. In the beginning, a considerable part of your premium is lost towards charges.
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Market realities
Another reason why you earn less from your Endowment Plan in the initial years is that the market is volatile, and you are still learning how to navigate it. You may or may not take risks when needed, prefer to stay rather safe and miss out on potential opportunities of gains.
Conclusion
While these points might make endowment policies seem like the best option, as always before buying insurance, read between the lines carefully and weigh the pros and cons. A regular life insurance plan has a lower premium than an endowment policy. Should you decide to terminate the endowment plan, the amount you will receive will be less than the premiums you paid. The returns of such a policy, though tax free, are also less than what you would get if you invested in a long term investment plan such as a PPF scheme.
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