If you are considering to buy an endowment insurance plan in immediate future then this is a must-read article. Read this article thoroughly because insurance premiums are never meager amount. It’s a commitment of years to pay money on the regular basis. So, be wise enough and spend only after making smart decisions.
When any insurance agent approaches you to sell a policy, he talks only about the endowment policy. He would count you the number of benefits on his fingertips and will try to lure you in the best possible manner. But, have you ever thought, why he emphasizes more on endowment insurance plans and not on term insurance?
Endowment insurance policy gives you benefits of both insurance as well investment. In this policy, a portion of the premium goes towards the insurance cover. Another portion meets the administrative expenses of the insurer. And a third portion is invested by the insurance company on behalf of the policyholder.
It seems that endowment Insurance plan gives you the benefit of both the world. But is this really the case? Is endowment policy is such a beneficial product? I am going to elaborate all about the endowment insurance policy. But before that, you must know about the different types of insurance schemes. Please note this policy is also known as the traditional insurance plan.
Also Read: How To Choose Life Insurance Policy
Different Types of Insurance Schemes
You can call this policy pure insurance. This is the most basic type of life insurance plan. This policy is most affordable life insurance plan. You get huge life cover by paying least premium as there is no payout at maturity.
The insurance companies do not use a part of the premium for investment thus making it the cheapest. It simply means that companies provide life cover with no savings / profits component.
If you go for online plans you can get a life cover of one crore easily in 8000-10000 rupees. A fixed sum of money – the sum assured – is paid to the beneficiaries if the policyholder expires during the policy term. If the policyholder lives his life, there is no payout.
Endowment Insurance plan or Traditional Policy
This policy differs from term plan in one critical aspect i.e. maturity benefit. Endowment plans give you a fixed amount (sum assured) plus some bonus at the end of policy term. It pays out the sum assured under both the scenarios- death and survival.
The maturity benefit of endowment insurance plan is an outcome of the premium which used for investment. Becuase of the extra premium of investment, the overall premium goes up.
Agents, prefer to sell the endowment policy because it gives them commission up to 35% of your premium. Later agents get 5% commission per year.
Whole life policy
A whole life insurance policy covers a policyholder all his life. That means you’ll get cover till your life term. The main feature of a whole life policy is that the validity of the policy is not defined so the individual enjoys the life cover throughout his life. The policyholder pays regular premiums until his death or up to a fixed age. The maturity benefit is paid out to the family or the nominees. The policy expires only in case of an eventuality as there is no predefined policy tenure. This policy is used to transfer the wealth to the heirs.
Unit linked insurance plans (ULIP)
Before financial crisis and recessionary period of 2008, ULIPs used to be a big success in the insurance industry. It was largely due to mis-selling by insurance agents. ULIPs are a variant of traditional endowment insurance plan but differ from them in certain areas.
As the name suggests, the performance of ULIP is linked to stock markets.The ULIPs invest the part of your premium into the share market as well. If the market goes up, this plan will perform better and vice versa.Therefore, the maturity value of your ULIP is dependent upon the share market performance.You can choose the allocation for investments in stock & debt markets.
The value of the investment portfolio is captured by the NAV (net asset value). In this context, there are many similarities between ULIPs and mutual funds. ULIPs differ in one area, they are a combination of investment and insurance, while mutual funds are a pure investment avenue.
Money Back Plans
As the name clearly suggests, you get money back at regular intervals along with retaining and enjoying the benefit of life insurance. But you should always remember that in this policy you’ll have to shell out much more premium than you do in term insurance for the same life cover. But despite this fact money back policies are very popular in India.
Money back policies come under the category of endowment insurance plans. The money that you get back after a specific interval of time is called Survival Benefit. However, if the policyholder dies during the policy term, then the death benefit would be paid to the nominee and the policy would be terminated and no further money would be paid on the intervals.
Thus, you can say that this policy is an endowment with a liquidity benefit. There is a small difference that you should be aware of. The maturity benefit comes in installments instead of a lump-sum at the end, unlike regular endowment insurance plans. Each installment is a percentage of the sum assured. It’s good policy to buy if you predetermine you financial needs coming at regular intervals.
Comparative Chart of Endowment Plan Vs Term Plan Vs ULIP
The Advantage of Endowment Insurance Plan
There are various reasons to go for the endowment policy. If you can’t put aside money separately for investment and insurance then this plan may be suitable to you. Endowment insurance plans provide you decent life cover and savings at maturity.
Moreover, It has a surrender value, loan value and paid-up value. It means if you want to surrender the policy before the tenure, you can do it easily. After some deduction, the premium paid would be returned to you. The longer you hold the policy, lesser the amount would be deducted from the policy. Usually, it’s not a wise decision to surrender as you get less amount than what you paid as premiums.
Get Loan Against Policy
Another feature of the policy is that you can get a loan against the endowment insurance policy. The amount of loan is determined on the basis of total premium paid till date.
If you take policy from LIC then the interest rate of the loan would be as low as 10 percent which is far below the rates of personal loans. But remember, you can’t repay the loans in installments. Only the full amount can be paid.
In case, you are unable to repay the loan ultimately then it would be deducted from your maturity amount after completion of the term. Make sure you pay interest amount timely. the interest amount is generally accepted annually by LIC.
Insurance company calculates interest on the compounding basis. So, if anyhow you miss the payment within time, you’ll have to unnecessarily pay a bigger amount in next cycle.
Get the Policy Paid Up
Endowment insurance plans have paid up values also. In case you don’t wish to continue to pay a premium then after a certain period it will automatically convert into ‘paid up policy’. The paid up policy gives you the existing benefits but value gets discounted. The death benefit and maturity benefit is reduced by the factor of unpaid premiums. The policy continues till the maturity term.
Disadvantages of Endowment Insurance policy
If you want to park your money for high return investment purpose then stay away from endowment policy. Return is like any debt product and is very low.
When you calculate on the compounding basis, the return would be somewhere between 5-6%. You can’t even beat inflation which is now roughly around the same level.
So on the return parameter, endowment policies fail. You would never like to invest in a policy just for the sake of the safety of your money.
Premium is High
If your primary goal of buying this insurance plan is to get a decent life cover to financially secure your family, it would be a very costly policy. As you can see in the above chart to get a life insurance cover of Rs 50 lakh through the endowment plan will cost you 1.78 lakh per year. This is a high price and it would be unaffordable to you.
However, as I mentioned above, you can get an online term plan of same coverage for as low as 11,229/year.
Surrendering Early will Eat Your Money
If you feel trapped in an endowment policy or if you are a victim of misselling and want to come out of this plan then you’ll be hit financially. Surrender value in initial years is very low. The insurance companies deduct the maximum of the paid premium as fund management charges. So buy this plan only if you can remain invested for a longer duration. If you do not have prior knowledge about rules regarding surrendering and you surrender the policy then you might feel cheated.
The Recent Endowment Insurance Plans of LIC
Why Should not Take an Endowment Policy
There are enough reasons not to take an endowment policy. If you are smart investor then you would have analyzed all aspects. Still I’m summarizing it for you as a quick checklist.
No Real Return
You may not defeat Inflation. Always do remember that your return in any investment product should always be fairly above the rate of inflation. There is no meaning spending your hard earned money and valuable time if you are not getting the good return.
Better Investment Plans Available
Better you avoid endowment plans if the main objective is the investment. There are many better options available in markets if you want to make money from money. Even post office deposits have the potential to give a better return than endowment policy.
Mix up of Insurance and Investment
Mixing two goals is never a good idea. Your planning can never be sound and safe. Keep insurance and investment separate. For insurance purpose, it’s the best strategy to buy a pure term insurance. For investment, you have many options ranging from mutual funds to stocks, bonds and PPF (Public Provident Fund).
Leads To Underinsurance
You can never fulfill or meet the need of insurance just with the help of endowment plan. As a thumb rule, most of the financial planners recommend that life cover must be at least ten times of your annual salary. It suggests that if your annual income is 5 lacs, you must have the cover of at least 50 lacs.
Premium will be huge if you want to meet this condition by taking an endowment plan. A big chunk of your salary will only go in payment of premiums. Thus, ultimately, you’ll be required to take a relatively very affordable term plan to ensure sufficient life cover.
It’s very difficult to have a complete understanding of various endowment insurance plans offered by various life insurers. They all come with so many ‘ifs’ and ‘buts’. This very fact increases the chance of miss selling to you by agents or companies also. Companies just meet the quorum asking you to read offer document, But trust me, if you a first timer then you’ll understand very little about the scheme and procedures mentioned in the policy documents.
When Should you Take an Endowment Plan
Endowment plans are neither pure life insurance nor pure investment. Yet it can be advised to buy for some categories of investors.
Endowment insurance policies are forced savings. You can’t withdraw your money as and when you want. Thus, endowment plans make you a disciplined investor. People with no emergency arising at the moment generally don’t surrender because of fear of losing a big chunk of their paid premiums. Risk cover is less in this policy but it is a great help to the family if something untoward happens to the main bread earner of the family. Usually, endowment insurance plans are often preferred by risk-averse investors.
Therefore, If you are looking for a product which gives risk-free and tax-free return with a little insurance cover, it is a good product.
But, keep in mind, don’t fully depend on endowment plans for life insurance purpose. You can keep this in your portfolio just as a safe investment product for tax benefit and long term disciplined savings.
You can also go for the endowment insurance plan if really want to oblige your relatives at your cost.
Recommended: 10 Best Tax Saving Investments
The Alternatives of Endowment Insurance Plan
Term Plan and PPF
It is a far better alternative of an Endowment Plan. Term life insurance is very cheap. It gives high insurance cover in less premium. Hence, you would be able to take sufficient life insurance cover at a very low premium. The Online term plan is further cheaper.
Whereas Public provident fund scheme offers the interest rate of 8.7 percent. This return is far higher than endowment plans. The PPF also gives you tax saving similar to insurance policies.
Though there is 15 years lock in period in PPF, it has more liquidity benefit than an endowment insurance plan. You can take a loan against the PPF, You can partially withdraw the balance and you can reduce or increase the regular investment. You can open a PPF account with any public or private sector bank very easily.
To understand it better just look at a simplified comparison. If you invest Rs.45,000 every year for 33 years in a PPF account, it will grow to Rs.65 lakhs, assuming 8% p.a. If you invest Rs.50,000 in LIC Jeevan Anand for 33 years, you will get a cover of Rs.18 lakhs only and will get maturity value of Rs.46 lakhs (approximately) assuming current bonus rate.
Term Plan and ELSS
This is as well a better alternative of the endowment policy. Get term plan for insurance purpose, cover depending on your financial needs.
For investment part, put your money into the ELSS (Equity linked savings schemes). ELSS is basically a category of equity mutual funds which gives tax benefit as well under section 80C.
The ELSS category has given average returns of 17.8% in the past three years. The three-year lock-in period is the shortest for any Section 80C investment. Remember, ELSS is market linked, so the returns are never guaranteed.
Term Plan and NSC
In this combo also, the strategy is the same. Without any dilemma, take a pure term plan for your insurance needs. For safe investments, National Savings Certificate is a very good option.
NSCs are issued through India Post. It has the maturity period of 5 years. The interest rate on NSC is compounded half yearly and is announced by the government every year before first April and the keep on changing every year. The return is 8.5% per year. It also gives tax benefit under section 80C.
Term Plan and NPS
Term plan for insurance cover and National Pension System for post-retirement corpus is again a smart combo to choose instead of investing in the traditional endowment policy.
NPS as a retirement tool has become attractive with low cost, flexibility & long term higher growth due to equity component. NPS is a very good vehicle to save for the retirement corpus gap. It also gives tax benefit under section 80C. Rather, you can invest up to Rs 2 lacks in NPS and enjoy the tax deduction.
The idea is simple. Contribute every year till you turn 60. You can then withdraw from the corpus but a minimum 40% of the corpus must be used for buying an annuity i.e. regular pension. What makes it interesting is that NPS allows an equity component of up to 50% of your contribution. For the rest, you can select government and/or corporate bonds.
Thus, we can say that NPS has an edge over PPF and NSC both due to its equity component and guaranteed long-term reliable savings.
Term Plan and Tax-Free Bond
If your aim is to get decent tax free income with low risk then tax free bonds are another exciting option for investment. These bonds have, over the years, emerged as highly popular investment option due to the taxation benefit that they offer. Generally, these bonds are offered by the government backed companies.
Interest income received from tax-free bonds is exempt under the Income Tax Act, 1961. IRFC, PFC, NHAI, HUDCO, REC, NTPC, NHPC are some of those government entities that offer tax-free bonds. These bonds are issued in 10 years, 15 years & 20 years maturity period and you’ll be happy to know that there is no lock-in. Such bonds are likely to be listed on NSE / BSE and could be held either in Demat or physical form. You can sell it in the market if the need arises.
Assuming a tax-free coupon yield of 8.2%, the implied pre-tax rate will be about 11.79% for investors in the 30% tax bracket (those earning more than Rs 10 lakh a year).
Investment portion is fixed and for insurance keep the strategy same and take a term plan according to your need. As a thumb rule, life cover should be at least ten times of your annual income.
If you’re a Bollywood buff then an interesting information for you. Superstars like Aamir Khan and Kareena Kapoor have been investing in tax free bonds. Indeed, the tax free bonds have become a vehicle for the rich to avoid tax.
Hope everything stated above is clear to you and enough to take a rational decision regarding insurance and long-term safe investment. Let’s summarize it again for you. In a nutshell, endowment plan is a mix of insurance plan and investment plan. Almost 90% premium is used for the investment plan.The insurance plan gives money if one dies during the insurance period. While the investment plan gives money if one lives his life till the maturity.
For an idea about a specific endowment insurance plan, please refer to our article on a newly launched LIC Jeevan Labh.
If you want a high return on your investment then endowment policies are not for you because they are not even able to beat inflation. But if you want a safe option with the benefit of life cover, you can analyze these policies. But better you apply your mind a little, do some research work, decide your goals and choose one from above mentioned combos according to your risk appetite and age.
For all the investment related queries and advice we’re always here with you. Keep reading. Invest smart. Invest safe with our help.