Endowment Plan vs Fixed Deposit (FD) - Where to Invest in 2022?
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One of the biggest phases of creating an investment plan involves choosing the investment options for your portfolio. Here is where you need to compare different investment avenues and decide which ones you want to invest in.
Comparing two investment options is quite an exercise in diligence. You need to see how they stack up against each other in various areas such as risk, returns, features, benefits, taxation and more.
To help you understand how this works better, let's take up two investment options - pure endowment plans and fixed deposits. Both these investment options come with their own benefits, and they are typically preferred by investors who are looking for safer investment avenues.
In order to see how the two compare, it is essential to first get the fundamentals sorted. So, let us take a closer look at what an endowment plan and what a fixed deposit is.
What is an Endowment Plan?
An endowment plan is a kind of life insurance policy that offers the dual advantage of a life cover as well as an element of savings. By purchasing a pure endowment plan, you can save diligently over the long term, during the policy duration. These savings add up with time, and grow into a sizable maturity benefit.
So, in case the insured person survives the policy term, the savings component is paid out as the maturity benefit at the end of the period. On the other hand, if the person passes away during the policy term, the death benefits guaranteed under the plan are paid out to the nominee assigned by the policyholder.
This is, in short, how an endowment policy works.
What is a Fixed Deposit?
A fixed deposit is an investment avenue that is offered by banks and Non-Banking Financial Companies (NBFCs). Here, you invest your funds for a fixed term, over which the bank or NBFC pays out interest to you at a predetermined rate. The rate of interest depends on the amount of money invested as well as the period over which you invest the said capital.
The interest can either be reinvested in the deposit, in which case the FD is known as a cumulative deposit, or it can be paid out to the depositor at regular intervals. The frequency of payouts can be monthly, quarterly, semi-annually or even annually.
Pure Endowment Plans vs Fixed Deposits
Now that you have gone over the basics of both endowment plans and fixed deposits, it's time to compare the two and see how they match up in various areas. For better clarity, we have chosen five key aspects of these investment options. See how they stack up against each other, so you can make a more informed decision about which investment avenue to choose.
Duration of investment
The duration of investment is an important parameter to consider. It helps you understand whether a particular investment option is better suited for a long-term goal or a short-term target. Here is how FDs and endowment plans compare on this front.
Endowment plans are typically long-term investments, spanning over 20 to 30 years or more. They help inculcate a habit of disciplined savings over the years.
Fixed deposits are typically considered as mid-term to long-term investment avenues. However, the tenure of FDs can range from 7 days to 10 years.
The investment amount is simply the capital required to get started with your investment journey. Each type of investment option has its own minimum investment requirement. Take a look at the investment amount needed for endowment plans and fixed deposits.
You can invest a lump sum amount in case of single premium plans. However, in most cases, endowment plans allow you to invest small amounts periodically over the policy term. The premium you need to pay or invest depends on the amount of coverage chosen and the features and benefits of the plan. But typically, you don't need a lump sum amount to purchase this kind of policy.
The minimum amount you can invest in an FD is Rs. 1,000. There is no upper limit on the investment amount. However, the main difference is that in the case of fixed deposits, you need to invest a lump sum amount. You can invest small amounts periodically.
The returns on an investment refer to the rate at and the manner in which you gain financially from the scheme or asset. Understanding this aspect helps you get a better idea of the level of risk associated with the returns. Take a look at the returns on endowment plans and fixed deposits.
The returns from endowment plans are usually paid out either upon the death of the insured person, or upon the maturity of the policy if the insured person survives the policy term. In case of the insured person's demise, the policy pays out guaranteed returns to the nominee. This is the sum assured under the plan.
However, in case the person outlives the policy term, the returns are paid out in the form of maturity benefits. These payouts may also include bonuses and loyalty additions.
The returns from a fixed deposit is in the form of interest on the investment. The rate of interest varies from one bank to another, and also depends on various factors like the amount of investment, the tenure of investment and the age of the depositor. Typically, senior citizens enjoy nominally higher rates of interest.
Due to any unexpected emergencies, you may find yourself in a position where you may need to withdraw your investment from a particular avenue prematurely. These withdrawals can have financial repercussions. You also need to know about this aspect before choosing an asset.
In case of an endowment plan, withdrawal is typically done in the form of surrender of the policy. When you surrender your endowment plan, you stop enjoying the coverage and other benefits offered by the policy. The insurer will also pay out the surrender value, if any.
In case of fixed deposits, withdrawal essentially means that you will get the capital you invested, along with accumulated interest, if any. However, the bank or NBFC will typically levy a charge for premature withdrawal before the end of the deposit tenure.
Lastly, before investing in any asset or scheme, you need to be aware of how the returns generated are taxed. This will help you figure out which investment option has the upper hand in this area.
Endowment PlansBeing life insurance plans, endowment policies offer a wide range of tax benefits2. The premiums you pay are deductible from your total taxable income as per section 80C of the Income Tax Act, 1961. This is up to a limit of Rs. 1.5 lakhs. Furthermore, as per section 10(10D), the death benefits and the maturity benefits are both tax-free in the hands of the recipients.
The interest you earn on your FD investment is taxed as per your income tax slab rate. Generally, the bank will deduct TDS on interest payouts at 10%. However, if your total income is below the exemption limit, you can submit Form 15G (or Form 15H if you are a senior citizen), requesting the bank not to deduct TDS. This saves you the hassle of claiming a refund later on.
Additionally, there is a special kind of fixed deposit that helps you save tax. Known as tax-saver FDs, the amount you invest in these instruments can be claimed as a deduction under section 80C of the Income Tax Act, 1961. Here too, the maximum limit of deduction is Rs. 1.5 lakhs. These FDs have a lock-in period of 5 years. However, the interest from these FDs is taxable as per your slab rate.
This sums up the key differences between pure endowment plans and fixed deposits. You can make use of these details to choose the right investment avenue for your portfolio. If you think you could benefit from both options, however, you can always tweak your investment plan to include an endowment policy as well as a fixed deposit. After all, both offer their own distinct benefits.
1 Provided all due premiums are paid
2 Tax benefits are subject to changes in tax laws. Kindly consult your financial advisor for more details.
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