Every step you take for your retirement planning should be defined clearly and you must not have any ambiguity in your mind. Several investment products are available in the market that you can choose according to your risk appetite and return expectations to achieve your financial goals. Similarly, there are different types of insurance products available in the market that can ensure the financial security of your dependent family members, you can choose the best one in sync with your risk cover requirement and premium affordability. What if you get both insurance and investment benefits in a single product, should you choose it? Endowment plans offer bundled insurance and investment benefits, but they may not suit everyone planning their retirement. Here are some important points related to the endowment plans that can help you decide whether you should consider them for retirement or not.
Should You Buy Endowment Plans For Retirement Planning?
Endowment plans are insurance products that allow insurance and investment benefits both within a single instrument. There are many attractive investment options available in the market and for insurance, one can choose a term plan, so the question is, should one buy endowment plans for retirement planning?
Low return on investment
Endowment policies usually give a return that ranges around 4 to 5 percent per annum which is much lower compared to other low-risk investment options available in the market such as bank FDs, liquid funds etc. One of the reasons which attracted people in the past towards endowment policies was the tax benefits available u/s 80C, but now the new tax regime is more beneficial in terms of tax saving compared to the old tax regime therefore traditional insurance policies have gradually lost their attractiveness. You can earn a higher return on another investment instrument even after paying taxes compared to the return offered by the endowment policies after claiming the tax deduction benefit.
Liquidity issue
If you want to exit the endowment policy investment, it may cost you a hefty penalty. Though you can get a loan against your endowment policy in a financial emergency, that option is also available with other investment instruments that offer a much higher return. For example, you can anytime exit the bank FD or the liquid fund if you need urgent liquidity and the penalty is usually minimal.
Long-term premium commitment
The endowment policy requires you to pay a premium for the long term. You can pay the premium till the policy tenure, pay in limited instalments or entire premium at once. If you stop paying the premium or exit the policy before maturity, you may get only a fraction of the total amount paid as a surrender value.
What should you do?
You must distinguish between your investment and insurance needs when you plan for your retirement. It is important to stay adequately insured and therefore you may consider an appropriate term policy for this purpose. For investment, you may consider mutual funds, FDs, etc. which are highly efficient instruments and also sync better with your risk appetite at various stages in your life and offer you a higher return on investment.
(The author is an Independent Financial Journalist)
(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)