Did you know about tax benefits in your endowment plan?

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Essentially known as a traditional life insurance policy, endowment plans offer a combination of insurance and investment. Apart from providing financial security to the life of an insured person, these plans help you save money over time. This enables you to receive a lump sum amount once the policy matures. Now, this money can be used for various impending needs like retirements, children’s weddings, etc.

Endowment plans are basically insurance policies that combine the advantages of investment, insurance and tax exemptions. These plans provide proceeds to the policyholder/to the nominee of the policy in the event of maturity or death respectively. Experts suggest this policy for, especially the risk-averse individuals who can settle for less profits over extra risks. It is largely considered as the insurance plan for the middle-class man.

Tax benefits

Being insurance policies, the investment in these plans are eligible for deduction under section 80C of the Act, subject to overall cap of Rs 1,50,000. Moreover, the maturity amount is fully tax-free in endowment plans, which gives it an advantage over Unit Linked Insurance Plans (ULIPs). Under ULIPs in case the annual premium exceeds Rs 2.50 lakhs, investment is treated as a capital asset, wherein the gain/loss  is taxed as long term capital gains or short term capital gains in hands of the investor, depending on the period of holding.

“Maturity proceeds (where the premium amount does not exceed 10% of the sum assured) are exempt under section 10(10D) of the Act. However, vide Finance Act 2021, exemption under section 10(10D) has been withdrawn for maturity proceeds received, other than at the time of death, in the case of unit linked insurance plans where premium in any year exceeds  Rs 2.5 lakhs,” Shailesh Kumar, partner, Nangia & Co LLP said.

Payout

Endowment plans should always be considered long-term investment tool as it provides compounding returns over time if one follows a disciplined approach towards paying premiums. Apart from the maturity amount there is also an assured annual sum bonus paid to the insured person, which is a percentage of the sum assured.

“Endowment plans declare an annual bonus, typically paid out as a specific percentage of the sum assured. In case of the policyholder’s survival, additional bonuses accrued during the policy term are paid in addition to the sum assured. In case of death during the policy term, the death benefit is paid to the nominee, including the full sum assured along with the total accumulated bonus,” PolicyBazaar.com quoted on its website.

Loan facility

You can opt for a loan against your endowment policy without any collateral as and when needed. This is a huge benefit for policyholders who might need an emergency loan for any urgent needs.

High Surrender Charges

Most importantly, endowment plans are suitable for conservative investors who can stay invested for the long term. These plans have high surrender charges, and therefore it is advisable to sign the dotted lines only if you can invest regularly throughout the tenure of the policy