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 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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.