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Have you played the game ‘Spot The Difference’? Two images are given that look the same, but they have very minute differences. Our task is to spot the differences between the two images, sounds simple right? But it’s not!
The trick is to analyze both the images in ‘Parts’ and not as a ‘whole’.
We have to play this game of spotting the difference between policies while choosing the best policy to invest in. And we have to analyze the different ‘parts’ of the policy to conclude.
What is an Endowment Policy or Plan? Is mixing insurance with investment a good idea or not? Is it worth enough to add to your investment portfolio?
Let’s get started!
1. Endowment Policy & Pure Endowment Policy – What Is It?
i) Endowment Policy or Plan
An Endowment Policy is a traditional Life Insurance policy. As an Endowment Plan is a combination of insurance and investments, a lump sum amount is payable either on maturity or death.
Maturity can range from 10, 15, or 20 years or up to a particular age limit.
ii) Pure Endowment Policy or Plan
A Pure Endowment Plan is one where you get the lump sum amount on maturity. Nothing is paid if the proposer or the policyholder dies before the end of the maturity term.
Though popular in foreign countries, there is no pure Endowment Plan currently available in India.
2. Features Of Endowment Policy
Let us see some of the features of an Endowment Policy
- It is a mix of both insurance and investment. Because some part of the premium is assigned for risk cover, agent commission, and admin expenses, and the remaining part is invested.
- Bonus is declared every year. It is declared on the sum assured and not on the premium.
- The bonus is not payable immediately. It is either paid on maturity of the policy or the death of the policyholder.
- Also, the Bonus is only accumulated and there is no compounding of it. This is one of the main reasons for low returns in Endowment Plans
3. Types Of Endowment Policy
There are 2 types of Endowment Policy
- Without profit
- With profit
i) Without Profit – The bonus is fixed in the policy at the time of issuance. Therefore the number of returns in these types of endowment plans is less.
ii) With Profit – The insurance company declares a bonus every year depending on the surplus earned by the company.
4. Benefits Of Endowment Policy
There are 2 types of benefits that you get in an Endowment Policy
i) Maturity Benefit
ii) Death Benefit
Let us see an example of how does an Endowment Policy work?
If you are 30 Years old and paying an annual premium of Rs. 31,368 for a 30-year policy of Rs.10 Lakhs.
i) Maturity Benefit In Endowment Policy
At the end of 30 years, you will get around Rs.24.4 Lakhs as the maturity amount. It includes the Sum Insured + Bonus Accrued (a bonus rate of Rs.48/- has been assumed for the entire term)
Let us calculate the CAGR in this policy. It works out to 5.9% for a -30-year investment product. Even PPF offers around 8% returns in the long term.
I have assumed a bonus of Rs.48/- per annum per thousand sums assured, which is very difficult to continue for the next 30 years. Already, the level of the bonus rates has come down from Rs.70/- to Rs.48/-. This shows that the value of Rs.24.4 Lakhs projected is on an optimistic note.
ii) Death Benefit In Endowment Policy
Your nominee will get Rs.10 Lakhs plus bonus till date, in case of death during this 30-year term. The policy offers risk cover also for Rs.10 Lakhs, which can be purchased by paying Rs. 850/- per annum through online term policies.
5. Endowment Plan vs Term Plan
What is the difference between an Endowment Plan and a Term Plan?
|Term Plan||Endowment Plan|
|Covers only life risk||Is a mixture of insurance and investments|
|Only Death Benefit is available||Both death and maturity benefits are available|
|Premiums are lower||Premiums are very high|
|High Sum assured||Very Low sum assured|
6. Endowment Policy – Q & A
i) How to Calculate Endowment Policy Surrender Value?
If you want to calculate the surrender value of the Endowment Policy, please visit your nearest branch. The bonus for the policy is different every year(for different companies). So you would not be able to calculate the surrender value by yourself.
ii) What if I surrender the policy after paying 3-4 annual premiums?
Surrender value in the case of Endowment Policies is very low. Because you will only get 30% of the premiums paid minus the first-year premium and bonus accrued for previous years.
iii) What is the Best Endowment Policy or Plan?
If you are looking for the best Endowment Policy or Plan, you will find none. Many investment options are much better than the Endowment Plans which we will discuss later in the article.
So, first let us see, which Endowment Policies are available through LIC.
iv) What are the different LIC Endowment Policies?
LIC has 11 Endowment Policies and every policy has some different features.
- Jeevan Utkarsh
- LIC Jeevan Pragati
- Jeevan Labh
- New Endowment Plan
- LIC Single Premium Endowment Plan
- New Jeevan Anand
- Jeevan Rakshak
- Limited Premium Endowment Plan
- Jeevan Lakshya
- Aadhaar ShilaAadhaar Stambh
v) Are LIC Endowment Plans good?
LIC Endowment Plans were good when there were no other investment options. Now there are better investment options. If you are happy with a 5%-6% return on your investments, the LIC Endowment Plan is good.
vi) Are Endowment Policies Tax-Free?
Yes, Endowment Policies are tax-free if your sum assured is 10 times the insurance premium. As these policies come under EEE tax benefits
- Exempt at the time investment
- Interest or any income on the product is exempt
- Exempt at the time of maturity
But this should not be your sole reason to buy this policy.
7. Alternate Investment Options
Now, let us see how by spending the same amount of Rs.31,368 annually, can you meet better results. Suppose you are going for a Term Insurance of Rs.10 Lakhs (with a premium of Rs.850/-) and decide to invest the balance Rs.30,518 (Rs.31,368 -Rs.850=Rs.30,518) every year for 30 yrs.
A.) For Risk-Averse Investor
You can invest this amount in PPF. Though I have assumed an interest rate of 7% throughout, as against the current interest rate of 7.6%. So the value of Investment of Rs.30,518 in PPF for 30 years would be Rs. 29 Lakhs.
PPF is a safe, 15-year investment scheme with the flexibility to pay any amount between Rs.500 – Rs.1 Lakh in a year. You can also extend it in blocks of 5 years and this is going to be tax-free.
In case of death anytime, your family will get Rs.10 Lakhs from the Term Insurance and the accumulation in the PPF account. In both cases, it is better than the Endowment Policy.
But before investing, Click Here to get a thorough understanding of PPF.
B.) For An Aggressive Investor
i) Endowment Plans Vs Mutual Funds
You can invest this amount of Rs.30,518 annually in a good-performing mutual fund. The returns will be around 12%, based on the last 15 years history, and the accumulated value of this mutual fund investment will be around Rs.73 Lakhs at the end of 30 years.
In the case of death anytime during these 30 years, your family will get Rs.10 Lakhs from Term Insurance and the accumulated value in mutual funds already invested. In both cases, your family will get more.
So it is better to avoid Endowment Policies for investment purposes. Instead, invest in a good Term Insurance plan and invest the balance in good investments for better returns.
ii) Endowment Plans Vs ULIP
Endowment Plans are by design debt-heavy because they only invest in recognized debt or government assets and refrain from buying stocks. As a result, they are unable to produce returns that are equivalent to UlIPs with an equity component.
If ULIP charges are in the 8–10% range, charges in Endowment Plans might reach 30–40% in the first year.
8. Negative Aspects Of Endowment Life Insurance
Why then would someone give this kind of insurance second thought? There are disadvantages to having Endowment Life Insurance:
i) High Premiums.
Compared to other insurance coverage choices, such as permanent insurance with a cash value component, Endowment Life Insurance often has higher rates. It’s critical to consider whether the benefits outweigh the costs.
ii) Minimal Protection.
The life cover that you get from Endowment Policy is inadequate compared to the life cover from Term Insurance.
This is a loss when you take into account the high premium you pay for an Endowment Policy than Term Insurance.
iii) Low Profits.
Invested funds in a life insurance Endowment Policy earn interest, but the returns are often lower. Depending on your investment choices and risk tolerance, you might be able to get a far better return on your money by investing it in PPF or Equity Mutual Funds.
iv) High Surrender Charges
If you choose to terminate your Endowment Life Insurance policy early, there are certain consequences. Although you might be able to cancel the policy before the end of the agreement’s term, the insurance provider might impose a high surrender charge.
Additionally, any cash value you receive from the policy may be considerably less than the premiums you have already paid.
Endowment Plans were good when there were no other investment options. Now there are better investment options that give better returns with the same level of risk. So what’s the point of buying an Endowment Plan?
Endowment Policies are neither good for Insurance nor for Investment.
Therefore, it will be better to go for Term Insurance and invest in good investments for better returns.
Please avoid Endowment Policy and Say No to it.
Though we have tried to cover everything about Endowment Policy, What is your view on it? Would you still buy it? Please share your views. Also, do not forget to share it with your friends and loved ones.