Saving tax while building wealth? Two popular options confuse people – ELSS and endowment plans.
Are they the same? Different? Can you use both together?
Let’s understand the meaning, how endowment plans work, and how combining both creates complete financial security.
ELSS Meaning Explained Simply
ELSS means Equity Linked Savings Scheme. A mutual fund that invests your money in the stock market.
Two main features:
Saves tax under Section 80C up to 1.5 lakhs. Money grows through equity investment over the years.
The lock-in:
Your money stays locked for a minimum of 3 years. After that, withdraw anytime or keep invested.
Why do people choose ELSS:
Shortest lock-in among all 80C options. Better returns than FD or PPF historically. Simple to invest through SIP.
What is an Endowment Plan
After learning the ELSS meaning, let’s see what the plan is. An endowment plan is an insurance product that mixes life cover with savings.
How it works:
Pay a premium regularly for a fixed period – say 15 or 20 years. Get life insurance throughout this time. If you survive till the end, you receive the sum assured plus the bonus. If you die during the term, the family gets the sum assured.
Main features:
Guaranteed payout either way. Safe and predictable. Includes life protection. Builds corpus slowly but surely.
Key Differences Between Both
Understanding the ELSS meaning versus the endowment plan shows they’re quite different.
Returns:
ELSS: Market-linked, historically 12-15% yearly. It can be higher or lower based on the market.
Endowment: Guaranteed base, typically 4-6% yearly. Safe but modest returns.
Lock-in period:
ELSS: Just 3 years. Shortest among 80C options.
Endowment: Full policy term, usually 15-20 years. Much longer commitment.
Risk level:
ELSS: Higher risk due to market exposure. Value can fall short term.
Endowment: Very low risk. Returns are predictable and safe.
Life cover:
ELSS: No life insurance included. Pure investment product.
Endowment: Life cover is a built-in feature. Family is protected if you die.
Flexibility:
ELSS: Start, stop, or change amount easily. Very flexible.
Endowment: Fixed premium commitment. Stop, and you lose heavily.
Why Use Both Together
ELSS and an endowment plan serve different purposes. Using both creates balanced financial security.
ELSS provides:
Higher growth for wealth building. Tax saving with flexibility. Market-linked returns for beating inflation.
Endowment provides:
Life insurance protection for the family. Guaranteed safe returns. Disciplined long-term saving. Maturity corpus with certainty.
Together they cover growth, safety, and protection – a complete package.
Sample Strategy Using Both
Let’s see how 35-year-old Priya uses both for financial security.
Her situation:
Monthly income: 80,000. Can save 20,000 monthly. Goals: Tax saving, child’s education in 12 years, family protection.
Her strategy:
For growth and tax saving: ELSS SIP: 10,000 monthly (1.2 lakhs yearly). Expected corpus in 12 years: Around 28 lakhs at 12% return. Saves tax under 80C.
For safety and protection: Endowment plan: 40,000 yearly premium for 12 years. Sum assured: 8 lakhs with life cover. Expected maturity: Around 6-7 lakhs. Also saves tax under 80C.
Additional protection: Term insurance: 1 crore cover for 18,000 yearly. Pure protection for family.
Total monthly outgo: ELSS: 10,000. Endowment: 3,333 (40k/12). Term: 1,500 (18k/12). Total: 14,833 monthly.
Results after 12 years:
From ELSS: 28 lakhs (high growth portion). From endowment: 6-7 lakhs (safe guaranteed portion). Total: 34-35 lakhs for the child’s education. Plus, the family had 1 crore protection throughout.
This balanced approach uses the strengths of both while covering all bases.
For Different Life Stages
Age 25-30 (Early career):
Focus more on ELSS – 70% of savings. Small endowment – 20% for discipline. Term insurance – must have.
Long time ahead. Can take equity risk. The ELSS meaning becomes clear over decades of compounding.
Age 30-40 (Family building):
Balanced approach. ELSS – 50%. Endowment – 30%. Other debt investments – 20%. Term insurance – increase cover.
Need both growth and stability. Family protection is critical now.
Age 40-50 (Peak earning):
Shift slightly safer. ELSS – 40%. Endowment and debt – 50%. Other safe options – 10%. Continue term insurance.
Approaching goals. Preserve what you’ve built. An endowment plan’s safety becomes more valuable.
Age 50+ (Pre-retirement):
Reduce equity exposure. ELSS – 20-30%. Endowment and safe options – 60-70%. Continue the term till dependents are settled.
Capital preservation priority. Understanding the ELSS meaning includes knowing when to reduce allocation.
Tax Benefits from Both
Both save tax but work differently.
ELSS tax benefits:
Investment qualifies under 80C. Gains up to 1.25 lakhs yearly: Tax-free. Gains above that: Just 12.5% tax.
Endowment tax benefits:
Premium qualifies under 80C. Maturity proceeds tax-free under Section 10(10D) if the annual premium is below certain limits.
Combined advantage:
Max out 1.5 lakh 80C limit. Put some in ELSS for growth. Rest in the endowment for safety. Get a tax deduction of full 1.5 lakhs.
Taking Action
Understanding the ELSS meaning and endowment plan features is step one. Doing something is step two. Start an ELSS SIP for growth and tax savings. Consider a small endowment if you value guaranteed returns and built-in cover. Get adequate term insurance for proper family protection.
Your financial security needs action, not just knowledge. Calculate. Decide. Invest. Start today. Build systematically. Reach goals eventually.
Image by Satheesh Sankaran from Pixabay (Free for Commercial use)
Image published on April 13, 2024
