Endowment Plans Vs Guaranteed Income Plans

Imagine you want to buy a car for your family of four. After extensive research, you have come up with a choice between the Maruti Dzire or Maruti Swift. They both offer the same mileage and fuel capacity. However, despite these similarities, they differ in many other ways. Ultimately, you'll choose the one that best suits your needs and budget.

Similarly, if you want to buy a life insurance policy that offers both insurance and investment, you will come across two popular options - an endowment policy and a guaranteed income policy. Even though they seem similar, they differ in a number of ways.

This article will give you a better understanding of the differences and similarities between them, so you can choose the one that's right for you.

Let’s dive right in!
 

What Is A Guaranteed Income Plan?

A guaranteed income plan also called a Money-Back plan is a low-risk investment plan in which you invest your money for a certain period of time, and then receive the money back in periodic instalments in the form of guaranteed returns.

Interestingly, a guaranteed income plan also blends insurance into the overall offering:

The investment portion of the plan gives you periodic payouts if you survive the policy duration or after the premium payment duration gets over. The policy schedule specifies how much you will receive. The payout may serve as a secondary source of income to help you cover a variety of expenses over the course of your life.

The insurance plan serves as a safety net for your loved ones, ensuring they lead a comfortable life - in your absence.

There are three types of benefits payable under a guaranteed income plan -

1. Survival Benefit

   The survival benefit, as the name implies, is paid to you if you survive the policy term or after the premium payment duration gets over. It is paid per the policy schedule. This is essentially the “moneyback” benefit in the policy, which is paid till you survive during the policy term.

   The payouts can either be -

   A certain percentage of the sum assured.

   A certain percentage of the annual premium.

2. Death benefit

   If you pass away while the policy is active, your nominee will receive the death benefit, which is the sum assured you’ve chosen at the time of policy purchase.

   Note: The sum assured that your nominee will receive is exclusive of the survival benefits only if your policy offers the payouts during the policy period.

3. Maturity Benefit

   If you outlive the policy term, the insurance company will pay you a maturity benefit. It may either be -

   • The sum assured, or
   • The survival benefit in the form of periodic payouts.

   Note: The Maturity Benefit may vary across products.
    

Let’s understand the concept of a guaranteed income plan better with an example -

Alia buys a guaranteed income plan where she decides to invest an annual premium of Rs 2,00,000 every year.

She opts for a policy duration of 15 years and a premium payment duration of 10 years. As per the policy, the insurer will pay 15% of the sum assured as a survival benefit after the completion of the premium payment duration of 10 years i.e she will receive the survival benefit for a period of 5 years in this case.

If she survives the plan's tenure, she will receive the sum assured as a maturity benefit. If she passes away during the policy period, the sum assured (usually 20 Lakhs) shall be given to her nominee.

Let's understand how the benefits will be paid out under Alia’s policy -

Survival Benefit = 15% of the Sum Assured

= 15% of 20,00,000

= Rs. 3 Lakhs

This amount will be paid to Alia annually after the premium payment term gets over. The survival benefit will be paid every year for 5 years, i.e., from 2032 to 2036.

Death Benefit

In the unfortunate case that Alia passes away while the guaranteed income plan is in force, the insurer will pay a death benefit of Rs. 20 Lakhs to her nominee.

Maturity Benefit

If Alia survives the policy period of 15 years, she will be paid an additional maturity benefit of Rs. 20 Lakhs.
 

What Is An Endowment Plan?

An endowment plan is a blend of insurance and investment, which means that it provides you with a life insurance cover and helps you build a savings fund as well.

Under the policy,

• The death benefit is paid to your nominee if you, unfortunately, pass away during the policy term.

• The maturity benefit is paid to you at the end of the policy term.
   

Let's understand the concept of the endowment plan better with an example -

Meera buys an endowment plan in 2022 with a 20-year policy term and chooses a sum assured of Rs 25 Lakhs. An annual premium of Rs 1,50,000 needs to be paid across a premium payment term of 10 years. Her daughter, Diya is the appointed nominee. The policy states that Meera or her daughter will receive the sum assured as the maturity or death benefit respectively, depending on the event that occurs first.

Let’s see how the benefits will be paid out -

1. Maturity Benefit

   Meera will receive the maturity benefit once the policy term is over. So, Meera is entitled to receive Rs 25 Lakhs as the maturity benefit in 2042.

2. Death Benefit

   If Meera passes away in the 10th policy year, her daughter is eligible to receive the death benefit immediately. Therefore, her daughter, Diya will receive a death benefit of Rs 25 Lakhs in 2032. The policy will terminate after the payout is made.

Now that we know what both these plans are, let’s take a look at their similarities and differences -
 

Guaranteed Income Plan And Endowment Plan - Similarities

1. Maturity Benefit

   Both plans provide a maturity benefit to you if you outlive the policy term. Once the payout is made, the policy terminates.

2. Death Benefit

   Both these plans will provide a death benefit, i.e., a fixed sum to your nominee should you pass away unexpectedly during the policy period.

3. Loan Facility

   Both endowment and guaranteed income plans can serve as collateral for loans. Let's say you want a loan to buy property. In this case, both these plans can serve as collateral to secure the loan.

4. Tax Benefits

   Tax benefits are available for both endowment and guaranteed income plans under two sections of the Income Tax Act, 1961.

   • Under both these plans, you can claim a tax deduction of up to Rs. 1,50,000 on annual premiums under Section 80C.

   • The claim amount you or your nominee will receive is completely exempted from taxation under Section 10(10D).
      

Guaranteed Income Plan v/s Endowment Plan - Differences
 

Wrapping up!

So, these are the similarities and differences between endowment and guaranteed income plans. Both these plans combine insurance and investment.

1. If you are looking for a plan that gives periodic returns at regular intervals, you should go for the guaranteed income plan.

2. On the other hand, endowment plans are a good option if you want to build up a nice savings fund.

Ensure that you make the right decision considering your preferences and needs.