Two prominent options that often take center stage are the national pension system (NPS) and endowment policies. Both offer unique advantages and cater to different financial goals. Let’s strike a comparative analysis of these two avenues to know their features, benefits, and nuances.
NPS plan and endowment policy – what are they?
Endowment meaning
Endowment meaning is something many may not have an idea about. An endowment policy is a life insurance policy that combines insurance coverage with a savings component. It guarantees a lump-sum payout at the policy’s maturity or to the nominee in case of the policyholder’s demise during the policy term. Endowment policies are often considered a blend of insurance and investment.
For instance, Priya purchases an endowment policy with a tenure of 15 years. The policy promises her a maturity benefit along with life coverage. This ensures financial security for her family and a savings component for her future.
NPS plan
The national pension system (NPS) is a voluntary, long-term retirement savings scheme initiated by the Indian government. It offers a blend of market-linked returns and fixed returns, allowing individuals to contribute throughout their working lives and receive a pension post-retirement. The NPS is distributed into two tiers i.e., tier I and tier II. Tier I does not permit you to withdraw prematurely while Tier II offers complete flexibility in withdrawals.
For instance, Ravi, an engineer, who contributes a part of his salary to NPS scheme enjoys a tax benefit as per Section 80 CCD (1) and 80 CCD (1b).
Comparative analysis between NPS vs. endowment policy
Returns
Endowment policy: Generally, offers guaranteed returns, although they might be relatively lower.
NPS: Market-linked returns, which can be volatile but potentially offer higher growth over the long term.
Example: Neeta values the stability of guaranteed returns in her endowment policy, whereas Ankit is willing to take market risks for potentially higher NPS returns.
Purpose
Endowment policy: Offers a combination of life coverage and savings, catering to both protection and financial growth needs.
NPS: Primarily designed for retirement planning, ensuring a regular income stream post-retirement.
Example: While NPS safeguards Ajay’s retirement, an endowment policy secures Rahul’s family against unforeseen circumstances.
Tax benefits
Endowment policy: Premiums paid, and maturity payouts are eligible for tax benefits under Section 80C and Section 10(10D), respectively.
NPS: Contributions are eligible for tax deductions under Section 80CCD (1) and 80CCD (1 b).
Example: Preeti uses NPS to optimise her tax liability, while Karan opts for an endowment policy to secure tax-free maturity benefits.
Lock-in period
Endowment policy: Imposes a lock-in period, ensuring long-term commitment.
NPS: Generally, funds remain locked until retirement, except for specific conditions.
Example: While Rajan appreciates the enforced discipline of the NPS lock-in, Sanaya values the long-term commitment instilled by her endowment policy.
Withdrawal flexibility
Endowment policy: Premature withdrawal might lead to loss of benefits; loans can be availed against policy values.
NPS: Partial NPS withdrawals permitted under certain conditions in Tier I and complete withdrawal options in Tier II.
Example: When Meera faces a medical emergency, NPS lets her make a partial withdrawal, whereas Sunil considers an endowment loan for his child’s education.
Age consideration
Endowment policy: Attracts individuals seeking a balanced savings and insurance solution, regardless of age.
NPS: Best suited for young professionals due to the long investment horizon, allowing compounding to work effectively.
Example: Young entrepreneur Aarav opts for NPS, aiming to amass a substantial retirement corpus, while middle-aged Shalini chooses an endowment policy for financial protection and growth.
Insurance component
Endowment policy: Provides life coverage, ensuring financial protection for the policyholder’s family.
NPS: Doesn’t inherently offer life coverage; primarily a retirement-oriented investment.
Example: While NPS ensures Arjun’s retirement, an endowment policy safeguards Rohini’s family against uncertainties.
Risk profile
Endowment policy: Appeals to risk-averse individuals as it provides a fixed, predictable growth trajectory.
NPS: Requires a higher risk tolerance due to market-linked returns that could experience fluctuations.
Example: Aggressive investor Varun finds NPS aligning with his risk appetite, whereas conservative investor Kavya feels safer with an endowment policy.
Surrender value
Endowment policy: Accumulates a surrender value after a certain premium payment period, offering an option to exit before maturity.
NPS: No surrender value available in Tier I; partial withdrawals are allowed under specified circumstances.
Example: NPS participant Sameer values the flexibility of partial withdrawals, while Meenakshi’s endowment policy becomes a backup plan due to its surrender value.
Inflation protection
Endowment policy: Might not offer substantial inflation-beating growth due to fixed returns.
NPS: Provides a chance to counter inflation due to market-linked returns.
Example: NPS participant Rina aims to beat inflation, whereas Amit chooses an endowment policy for its steady growth irrespective of market fluctuations.
Medical underwriting
Endowment Policy: Involves medical underwriting to assess the policyholder’s health condition.
NPS: Doesn’t require medical underwriting as it’s primarily an investment vehicle.
Example: NPS participant Siddharth avoids the hassle of medical checks, while endowment policyholder Nisha undergoes them for comprehensive life coverage.
Maturity benefits
Endowment policy: Guarantees a maturity benefit comprising the sum assured and accumulated bonuses.
NPS: On maturity, the accumulated corpus can be withdrawn as a lump sum or used to purchase an annuity for regular pension income.
Example: Mira opts for NPS to enjoy the flexibility of structuring her retirement income, while Deepak appreciates the assurance of his endowment policy’s maturity benefit.
Flexibility of contributions
Endowment policy: Requires regular premium payments; non-payment can lead to policy lapse.
NPS: Allows periodic and voluntary contributions, facilitating flexible savings.
Example: NPS allows Ravi to adjust his contributions based on his financial situation, while Anjali appreciates the discipline enforced by her endowment policy.
Contribution limits
Endowment Policy: Premiums are determined by the sum assured, chosen policy term, and age.
NPS: Contribution limits under NPS Tier I for tax benefits; no maximum limit under Tier II.
Example: Avinash maximises his NPS contributions for tax optimisation, while Leela structures her endowment policy premiums according to her financial capacity.
Nomination and succession planning
Endowment Policy: Simplifies succession planning by designating nominees for death benefits.
NPS: Offers nomination and annuity options, ensuring a smooth transition of funds to nominees.
Example: NPS nominee Sonia can opt for annuity income after her husband’s demise, while endowment policy nominee Ramesh receives the death benefit directly.
Wrap-up
NPS and endowment policies stand as two distinctive financial instruments, each catering to diverse aspirations. NPS appeals to those seeking an assured retirement corpus through market-linked growth, while endowment policies offer a blend of protection and savings with the certainty of guaranteed returns. The choice between the two hinges on individual goals, risk appetite, and the balance between immediate benefits and long-term security. As you navigate these paths, remember that the true power of financial planning lies in informed decisions tailored to your unique journey.