Life insurance in 2022, in a world dealing with the consequences of the pandemic, is an investment that must not be skipped. A life insurance policy forms the basis of a robust financial plan. Without one, even planning for your retirement may not exactly be a sufficient safety net to fall-back on. Hence, a life insurance plan is considered a smart choice. It helps in securing your family’s needs for the future without compromising on your needs at present.
However, a catch for life insurance is that not all policies account for the fact that you might require the money yourself. While pure life insurance plans, like a term insurance policy, only compensate in the event of an unfortunate demise of the policyholder, an endowment policy is what helps you enjoy the benefits of your life insurance cover.
What is an endowment plan?
An endowment policy is a life insurance cover where the insurer offers dual benefits of savings and protection, in one plan. This policy aids you by not just providing protection for your life, but also helping you accumulate savings that can be used to meet long-term financial goals. Further, survival benefits are also paid when the policyholder outlives the policy tenure. This lumpsum payment at the end of the policy tenure can be used to fund your child’s education, buy a house, or simply serve as a part of your retirement corpus.
Since an endowment plan offers a host of benefits like life coverage, tax benefits, and maturity proceeds, it is a useful investment providing protection and corpus accumulation for your retirement. Let’s look at how the income component of an endowment plan can be used in retirement planning.
Endowment plans for retirement planning
Many buyers choose an endowment plan to be a source of financial protection for their dependents. But, a little-known feature is that these endowment plans can also be used as a tool in your retirement planning.
First, it is crucial to know that purchasing an endowment policy generates maturity benefits that can be used when you retire; be it for funding your retirement, taking care of routine expenses, buying yourself a retirement home and more. But many endowment plans are also structured in a way that aids in post-retirement income like pension plans.
Moreover, as the average life expectancy of a person increases due to advancements in medical science, it is important to consider that there will be a longer retirement period and a large corpus may be required during this phase. Endowment plans at this time help ensure financial support by way of maturity proceeds as well as providing protection to your family in case of an unfortunate demise.
The benefits of endowment plans during retirement
- During your golden years, an endowment plan helps generate a stable source of income. In most cases, this endowment policy pays a lumpsum amount or a regular income if you have opted for the guaranteed income plan. Depending on the insurance company, these are available options to receive the maturity proceeds in an endowment policy.
- A stable income or a lumpsum amount by way of maturity proceeds from an endowment plan can help manage steep medical costs that are generally associated with increasing age. Alternatively, it can also be used to meet your day-to-day expenses that can increase due to rising inflation during your retirement.
- On one hand, where an endowment plan can be used to support your retirement, these endowment plans also act as a financial shield for your dependents in your absence, thus securing your life and your retirement in one single premium payment. So, whichever way your life shapes, you are prepared for it.
- In addition to the protection feature and savings feature, an endowment plan also enjoys tax benefits. Section 80C allows the policyholders to claim a deduction of the amount of premium paid for these endowment plans in their return of income. Further, for policies issued after 1st April 2012 where premiums for these endowment plans do not exceed 10% of the sum assured and 20% for policies issued after 1st April 2012, the amount received on maturity of the endowment policy including the bonus component is fully exempt from tax under Section 10(10D).