At Finvision, we often see individuals opting for endowment plans, but what exactly are they?
Let’s understand!
Endowment plans are life insurance products that combine insurance coverage with savings, offering a lump sum payout either at the end of a specified term or upon the policyholder’s death. Often used to secure a dependent’s financial future, these plans promise guaranteed payouts. However, they come with costs like GST on premiums and taxes on returns, which can significantly reduce the actual benefits.
We recently had an encounter with an 80-year-old retiree who has invested in an endowment plan to ensure his 45-year-old daughter would receive a steady income after his passing. While this seems like a thoughtful decision, a closer look at the numbers reveals some concerns.
The Plan Overview
The plan requires a ₹15 lakh annual premium for five years. The benefits begin after 11 years, with the daughter receiving:
Annual payout of ₹7.27 lakh for 24 years
A lump sum of ₹75 lakh in the 25th year
At first glance, this might appear secure, but let’s break down the actual costs and returns.
1. GST Impact
Endowment plans attract a GST rate of 4.5% on the premium in the first year. A GST rate of 2.25% is applicable from the second year onwards.
4.5% of ₹15 lakhs premium = ₹ 67,500 (in the first year)
2.25% of ₹15 lakhs premium = ₹ 33,750 from year two to year five.
Total GST for 5 Years
₹ 67,500 (1 year) + ₹ 33,750 × 4 ( years 2-5) = ₹2,02,500
This amount comes to be approx. ₹2 lakh GST.
2. Tax on Returns
After 11 years, her daughter will begin receiving ₹7.27 lakh annually for 24 years.
However, this income is taxable. Assuming his daughter is in the 30% tax bracket, she’ll be paying ₹2.27 lakh in tax each year, which means she’ll only be left with approx. ₹5.00 lakh annually.
3. What are the real returns?
Yearly payout post-tax = ₹5.00 lakh
Total for 24 years = ₹5.00 lakh x 24 = ₹1.20 crore
One time lump sum on 25th year = ₹51.75 lakh (post-tax)
Total money received = ₹1.20 crore + ₹51.75 lakh = ₹1.72 crore (approximately)
4. The real return on investment (ROI)
Her daughter will receive ₹1.72 crore over 25 years.
Given that ₹77 lakh (₹75 lakh premium + ₹2 lakh GST) is being invested, the money compounds at just 3.71% CAGR over 35 years.
Leave aside the mutual funds, even a simple Fixed Deposit (FD) at a 5% post-tax interest rate would yield significantly higher returns.
This amount invested smartly could nearly double or quadruple the returns over the same period.
Conclusion
While endowment plans offer a sense of emotional security, they come with hidden costs and relatively low returns. Before committing, it’s essential to evaluate all factors, including the applicability of taxes and GST, and explore alternative investment options that might deliver better results.
Need help understanding your financial options? Contact Finvision Financial Services for expert advice today!
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