Ask yourself: Why do you take a life insurance? The thought is: if you are an earning member of the family, will the family manage its finances after your death.
If that is your answer, then why do you you always invest in endowment plans, which offer very little insurance cover and is not enough, to meet the needs of the family after death of the breadwinner.
LIC Term Plan Vs LIC Endowment Plan
Now, let us understand what a term plan is. A term plan is one in which you do not get your premium money back. You get very high insurance coverage. A healthy male could get as much as Rs 1 crore insurance, with a small insurance premium of Rs 10,000.
On the other hand in the endowment plan, if you pay Rs 10,000 every year, you may not get an insurance of not more than Rs 3 lakhs. However, you will get your money back, in case you survive.
Now, you should ask yourself: If something were to happen to you, would Rs 3 lakhs be enough or the family would be happy with Rs 1 crore?
This is why a term plan is better.
Insurance vs investment
Term plans offer you very high insurance coverage, but, you do not get the money back. In an endowment plan, you get your money back with returns as low as 4-6 per cent.
But, if you die your family would get a very small sum in an endowment plan, that would not be enough to sustain them. In fact, if you have a home loan, it would not be adequate to cover the home loan. In an endowment plan, if you pay Rs 10,000, you would get insurance coverage of just about Rs 3 lakhs, depending on your age.
It is also important to remember, that the younger you are the lower is the insurance premium. The older you become, the prdmium keeps getting higher.
The ideal way out
We strongly recommend that you do not take an endowment policy. If you want insurance go for a term insurance plan. LIC Term insurance plans offer you very high coverage and for sums of as little as Rs 10,000 in annual premium, you can get insured for more than Rs 1 crores.
On the other hand, if you are looking for investment take a term insurance plan first and then invest in equity mutual funds or quality debt funds or look for investments like the Public Provident Fund.
The endowment plan offers you little of both worlds. A little of insurance and little of investment returns. It is half baked.
You can live with endowment plans, but not term insurance plans
Make sure that you have term insurance plans, in the early part of your life. It is a must for those in the 20s and 30s. We suggest that you do not bother about endowment plans. If you do not have them, it is okay, you can just skip the same. It is a product that is somewhere between investment and insurance and does not offer the best of both worlds.
Similar tax benefits
Both these investments offer you similar tax benefits under Sec 80C of the Income Tax Act. The interest income is also free from Income tax. However, as we mentioned earlier, do not go for these investments, just because you are getting tax benefits.
Invest in them, because you are getting insurance, and you can protect your family in the case of eventuality.
The best term insurance plans
In India, you must invest in insurance products, which have the best claim settlement ratio. What this means is that the insurance company pays back the money immediately on death of the insured to the insured person's family.
LIC Of India has the best claim settlement ratio. Hence, if you want to invest in LIC products, you can invest in term insurance, which includes the LIC Amulya Jeevan II and the LIC e term plan. In fact, under the LIC E term plan, you can get insured for sums above Rs 1 crores with annual premium of just under Rs 10,000. That is of course, if you are in your 20s. As your age keeps getting higher the insurance premium keeps going higher.
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