What is an Endowment Policy or an Endowment plan ? Why Endowment Policies should not be a part of your portfolio? Why you should not mix insurance with investments?
What is an Endowment Policy or Plan?
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 upto a particular age limit.
What is a Pure Endowment Plan?
A pure endowment plan is the one where you get the lump sum amount on maturity. Nothing is paid if the proposer or the policy holder dies before the end of the maturity term.
Though popular in foreign countries, there is no pure endowment plan currently available in India.
Features of Endowment Policy
Let us see some of the features of 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.
- Bonus is not payable immediately. It is either paid on maturity of the policy or death of the policyholder.
- Also Bonus is only accumulated and there is no compounding of it. This is one of the main reasons for low returns in endowment plans
Types of Endowment Policy
There are 2 types of endowment policy
- Without profit
- With profit
Without Profit – The bonus is fixed in the policy at the time of issuance. Therefore the amount of returns in these types of endowment plans are less.
With Profit – The insurance company declares bonus every year depending on surplus earned by the company.
How does an Endowment Policy Work?
There are 2 types of benefits which you get in an endowment policy
- Maturity Benefit
- Death Benefit
Let us see with an example on 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.
At the end of 30 years, you will get around Rs.24.4 Lakhs as maturity amount. It includes the Sum Insured + Bonus Accrued (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 on long term.
I have assumed bonus of Rs.48/- per annum per thousand sum assured, which is very difficult to continue for the next 30 years. Already, the level of the bonus rates have come down from Rs.70/- to Rs.48/-. This shows that the value of Rs.24.4 Lakhs projected is on an optimistic note.
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.
Endowment Plan vs Term Plan
What is the difference between endowment plan and 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|
Endowment Policy Surrender Value Calculator
If you want to calculate surrender value of 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 surrender value by yourself.
What if I surrender the policy after paying 3-4 annual premiums?
Surrender value in case of Endowment Policies is very low. Because you will only get 30% of the premiums paid minus first year premium and bonus accrued for previous years.
Best Endowment Policy or Plan
If you are looking for best endowment policy or Plan, you will find none. There are many investment options which 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.
LIC Endowment Policy or Plan
LIC has 11 endowment policies and every policy has some different feature.
- 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
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% returns on your investments, LIC endowment plan is good.
Are Endowment Policies tax free?
Yes, endowment policies are tax free if your sum assured is 10 times of the insurance premium. As these policies come under EEE tax benfits
- 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.
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.
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 PPF account. In both the cases, it is better than the Endowment Policy.
For an aggressive Investor
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 the cases, your family will get more.
So it is better to avoid Endowment Policies for investment purpose. Instead, invest in a good Term Insurance plan and invest the balance in good investments for better returns.
Why Endowment Policy should be avoided ?
Endowment Policies are neither good for Insurance nor for Investment. Finally, below are the reasons for which you should avoid endowment policy
- High Premium
- Low Sum Assured and Less Returns
- Low Surrender Value
Therefore It will be in your interest to go for Term Insurance and invest in good investments for better returns.
Also,Be a good investor and not a good saver.
Avoid Endowment Policy and Say no to it.
Hence Do not mix insurance with investments.
In Conclusion, endowment plans are a big NO. 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.