After choosing the most appropriate investment plan, most of the time, people confuse an endowment policy with other investment options. You may come across mutual funds, fixed deposits, term insurance, shares, or even gold. But how do you choose what is best for you? Don’t worry. Here on this blog, we shall explain it to you in the simplest form so that you understand the difference and can make a smart choice for your future.
What is an Endowment Plan?
Endowment plan is a mix of insurance and savings. It means that you get life coverage, and at the same time, your money grows slowly in a safe way. If you pass away, your family gets the insurance money. If you survive, you get the savings amount when the plan ends.
Briefly, it is as if you are getting two benefits together in a single plan:
- Protection of your life
- Money back after a certain period
This makes endowment plans popular among people who want security as well as savings.
How Endowment Plans Function
- You pay premiums from time to time (monthly, every year, or as you’ve chosen).
- Some of your money is invested in purchasing life insurance.
- The rest is invested in a safe way, so it grows over the years.
- When the policy term matures, you get a lump sum.
Example: If you buy a 20-year endowment plan and pay ₹50,000 each year. You will have life cover for 20 years. At the time of maturity of the plan, you receive a maturity amount (your savings and bonus).
Other Popular Investment Plans
Let us now consider other popular investment plans which are usually compared with endowment plans.
1. Fixed Deposit (FD)
- Certain safe return.
- No insurance cover.
- Interest is guaranteed but usually less than inflation.
2. Mutual Funds
- Money is invested in shares or debentures.
- Higher returns are available but risky.
- No insurance cover.
3. Term Insurance
- Pure insurance, no savings.
- Low cost, high life cover.
- No maturity benefit.
4. Stocks
- Investment in companies directly.
- High risk, high return.
- Requires knowledge and continuous monitoring.
5. Public Provident Fund (PPF)
- A long-term savings scheme guaranteed by the government.
- Safe and provides tax relief.
- No life insurance cover.
Endowment Plan vs Other Investment Plans
Let’s compare them briefly.
- Risk Factor: Endowment plans are low risk, but mutual funds and stocks are high risk.
- Returns: Mutual funds and stocks can give higher returns, but their returns are indefinite. Endowment plans give safe but moderate returns.
- Insurance Cover: Endowment plans provide life cover, but FDs, PPF, and mutual funds do not.
- Flexibility: Mutual funds and stocks are flexible (you can withdraw any time). Endowment plans require long-term commitment.
- Purpose: Endowment plans are for those who want savings with security. Other investments are for people who want growth with or without better returns.
Advantages of Endowment Plans
- Dual Benefit: Insurance + savings.
- Certain Savings: You get money at maturity.
- Secure Choice: Less risk than investments in the market.
- Protection for Family: If you die prematurely, your family gets money.
- Tax Advantages: Premiums and maturity value are tax-free.
Drawbacks of Endowment Plans
- Returns are usually lower than those of mutual funds or stocks.
- Premiums are higher than term insurance.
- No choice, since you must stay invested for extended periods.
Who Should Choose an Endowment Plan?
- Those who want a risk-free investment.
- Those who want life cover as well as savings at the same time.
- Those who don’t like to take risks.
- Families who want guaranteed money after some time.
Who Should Choose Other Investment Plans?
- If you are young and adventurous, stocks or mutual funds can be for you.
- If you are seeking only life cover at low cost, term insurance is the most suitable.
- If you are seeking assured returns without any risk, FDs or PPF can do.
A Simple Example
Assume there are two friends: Ramesh and Suresh.
- Ramesh purchases an endowment plan. He pays ₹30,000 every year. He gets his savings with bonuses after 20 years. His family has been insured for 20 years.
- Suresh invests in mutual funds. He pays ₹30,000 every year like Ramesh. His returns could be higher than Ramesh’s, but in case the market crashes, he could lose money too. Moreover, he has no insurance coverage.
This means that endowment plans offer protection, while other plans offer flexibility and the possibility of higher growth.
How to Choose What’s Right for You?
If you need to choose between an endowment plan and other investment channels, ask yourself these questions:
- Do I want safety or high returns?
- Do I need life cover as well as savings?
- Can I afford to risk my money?
- Do I want to invest short-term or long-term?
Your answers will lead you.
Balanced Approach
All experts suggest a balanced plan. You need not opt for one alone. For example:
- Invest in term insurance for good life coverage at cheap rates.
- Invest small money in mutual funds or PPF for growth.
- Use an endowment plan for safe savings and guaranteed money.
In this way, you get the best of everything – protection, growth, and stability.
Conclusion
No one plan fits all. It depends on your needs, objectives, and comfort level. If you want peace of mind, guaranteed returns, and security for life, an endowment plan is the right option. However, if you are ready to take risks and want to earn higher growth, options like mutual funds, shares, or even PPF will be best for you.
The intelligent thing to do is to know your goals beforehand, then select a mix of options that best fit your needs. Remember, investing has nothing to do with money; it’s about designing a safe and happy future for yourself and your loved ones.
