Who should buy an endowment policy?

Rajesh is a 35-year-old techie working with an IT major. He has two children aged three and one. Of late, he has started seeking investment avenues that will help him build a corpus to fund long term financial needs like his children’s higher education, his retirement etc. He has seen advertisements and read articles in newspapers extolling people to invest in mutual funds for long term wealth generation. However, he is highly risk averse and does not want to invest in mutual funds or stocks or for that matter in any investment which carries a risk of losing his hard-earned money. His philosophy is that it is better to get guaranteed returns even if they are lower rather than aim for higher returns which carry a risk or an element of uncertainty.
On hearing his requirement and understanding his low risk profile, his friend Ashish who is a financial advisor suggested that he purchase an endowment plan. Rajesh was interested and wanted to know more. This is what Ashish had to say:
1)      An endowment plan is a life insurance plan which combines savings and life insurance into a single product. In case of death of the life insured during the policy tenure the sum assured is paid out as the death benefit to the nominee. However, should the life insured survive the policy tenure, the sum assured is paid out as a maturity benefit.

2)      An endowment plan guarantees payment in both scenarios, death or survival unlike a term plan which provides only death benefit. Also, the maturity benefit is known beforehand and is guaranteed unlike in a mutual fund or a unit linked life insurance policy where the maturity benefit is dependent on fund performance.

3)      Endowment plans are long term plans providing life insurance coverage till a specific age (eg: till age 65, till age 75) or for a chosen tenure (20 years, 25 years etc) or even whole life. Premium payments are to be made regularly for durations ranging from 5 to 20 years (or more) and are hence best for people who have a regular source of income like working professionals. Premium payment at regular intervals helps inculcate the habit of savings.

4)      Endowment plans are basically of two types - with profit and without profit. For policies participating in the profits, bonus is paid by the insurance company which increases the benefits payable. The accrued bonus is paid out during death, surrender or maturity (product brochures provide comprehensive details of bonus).

5)      Tax benefits are available under section 80C and 80D of the Income Tax Act.

After hearing the features of endowment plans, Rajesh believes that this is the kind of plan he is comfortable investing in to achieve his financial goals. He decides to secure his savings and provide protection to his family by opting for an endowment plan. If you think that you also share Rajesh’s investment philosophy then probably an endowment plan is perfect for you. 

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