Any individual who has financial dependents must seriously consider buying a life insurance policy. If they were to pass away due to unfortunate circumstances, the money received from the policy can help the dependents deal with the financial loss. There are multiple kinds of life insurance policies in the market, with varying features. One of the most popular options among these is the endowment policy. The primary feature of an endowment plan is that it offers the policyholder the dual benefit of savings plus life insurance. Choosing an endowment plan over other types of policies can open up a world of benefits for you. Let’s explore these benefits in detail.
How does an endowment plan work?
First, let us understand how an endowment policy functions. Like most other life insurance plans, an endowment plan requires the payment of a premium on a regular basis. Unlike other life insurance plans, however, the premium of an endowment is used not only for life insurance coverage but also to create a savings corpus. In short, endowments are a product that merges life insurance and a savings plan under one product.
In the event of the policyholder’s demise, the life insurance cover amount is provided to the beneficiaries of the policy. If the policyholder survives the maturity of the policy, they receive the maturity benefit pay-out which includes the savings accumulated until that period.
Benefits of endowment plans
- You receive guaranteed income
Not everyone is suitable for the high-risk, high-reward approach taken by market-linked plans. Some are comfortable with moderate returns as long as they do not have to bear risks. An endowment policy is a perfect solution for the latter type of people. The savings part of the premium is parked by the insurer in fixed-income instruments. Due to this, your money is unaffected by the fluctuations in the market. This ensures that you receive a moderate amount of returns on your principal amount at maturity without worrying about market risks.
- You can use the policy as collateral for a loan
One lesser-known benefit of the endowment life insurance plan is that it can be used as a form of collateral against a loan. Whether it is a home loan, a car loan, or a personal one, your endowment plan can help you get a lower interest rate.
- You inculcate financial discipline
Keeping aside a certain portion of your income and saving it for a long-term goal is one of the best ways to inculcate a strong sense of financial discipline, and an endowment plan helps you do just that. The money parked in the savings instruments cannot be withdrawn until maturity. If required, you can surrender the plan. But that would mean incurring surrender charges and letting go of the benefits of the plan.
The ideal scenario is to choose a suitable premium payment frequency and pay the money on time for the entire tenure of the plan. When the policy matures, you receive the full amount that has been accumulated over the years, along with the returns it would have generated.
A life insurance calculator can help you get a premium estimate that fits your budget and is fit for the tenure and benefit pay-out you want.
- Your future goals are secured
With the lump-sum benefit received at the maturity of the life insurance plan, you can carry out a number of goals you may have planned. You can make a large down-payment on a house or buy a car, or you may use the money to fund your daughter’s higher education in a foreign university. You can even set up the plan in such a way that it matures at the time of your retirement so that you can fund your retirement goals with it.
- You receive tax benefits
Life insurance premiums can help you claim tax deductions up to Rs 1.5 lakhs, under Section 80C of the Income Tax Act, 1961. The maturity benefit pay-out of your endowment plan is also exempted from taxation, as long as the terms and conditions are met. To understand more about the income tax benefits you are eligible for, you can use an income tax calculator. Like the life insurance calculator, this tool uses an AI-based to give you an estimate of the tax deductions and exemptions you can enjoy.
It is advisable to consult a financial advisor and a tax expert before undertaking any major financial decisions.