Is Your Endowment Policy A Waste of Your Money?     (25-Jan-2011 )



Up to a few months ago, ULIPs were being pushed in a big way. An insurance product that helped you also invest in the equity markets, in a single contract, was being touted as a dream product come true.


Research was done and efforts to educate the investor have since rubbished these claims of godliness. Stories of this high commission product that had not yet even proved itself, with unscrupulous agents hard-selling them to unaware customers who didn’t even need these policies, made news time and time again.


Regulators stepped in, and ULIPs are now recovering from the bad press, quietly. Advisors are reluctant to really sell ULIPs, for fear that the client now knows that he will be getting a bad deal, and will not trust the advisor anymore. And lack of trust is one of the worst things that can happen to an advisor from his client.


So advisors are now selling traditional plans. Once again they are insisting that traditional plans are excellent, there is no market risk, the maturity value is assured, and everybody must have these policies.
But have insurance agents truly started working on your behalf instead of their own? Is a traditional plan really the best thing for you?
Let’s have a look.


What is a traditional plan?

Term plans, endowment policies, money back policies, pension plans – these are called traditional plans.


A term plan gives you life cover, with no maturity or interim benefits. Premiums are the lowest for this type of policy, and for this low premium, your family will get the highest benefit. A Rs. 10 lakh term plan for a 35 year old with a 20 year policy tenure will cost around Rs. 5,000 per year. Only very few advisors are actively selling this type of plan.


As customer wants evolve, so do industry offerings.
Customers weren’t always satisfied with the idea of no maturity benefit upon surviving the term of the policy, because a maturity benefit would help build up a retirement corpus, and so endowment plans were born.


An endowment plan offers you life cover, charges you higher premiums than a term plan, and gives you a maturity benefit. So if you survive the term, you will receive some amount of money as a maturity benefit, unlike in the case of a term plan. It also offers you bonuses along the way, paid out as an accumulated lump sum on maturity if you survive the term. over a 20 year tenure, your endowment plan, if you include bonuses, could yield you up to 8% per annum.


By itself, this return seems average, not poor. But, keep in mind this is over a horizon of 20 years.
In 20 years, considering inflation, your premiums will not be providing you much return at all. And a good diversified equity mutual fund will yield you double of this per year, beating inflation and giving you a return on your investment.


All said and done, an endowment plan yielding even as much as 8% per annum over a 20 year horizon (and not all endowments yield this, some yield 5% and 6%) is a waste of your money.


A money back policy is nothing but an endowment plan that’s been dressed up a bit.
While an endowment plan will give you a maturity benefit on surviving the entire term, a money back policy pays out for every few years of survival. If for example you take a 20 year money back policy, you will get some proportion (say 25%) of your Sum Assured every few years, say every 5 years. You will also get your remaining Sum Assured plus accumulated bonuses, on surviving the entire term.


Yield on a money back policy sometimes comes to a little more than yield on an endowment policy, considering that once you get the interim pay outs, you can invest them on the spot.


But overall, endowment policies and money back policies are poor performers, especially considering the fact that the tenure is so very long (20 years, 25 years, 30 years).



So what do you do if you’ve already got one of these traditional policies? Should you drop it?


Often we come across clients who have a number of such policies, having been sold multiple identical policies with different tenures by their agents. They want to know if they should drop their insurance policies.


This depends entirely on 3 things:


  1. What is the remaining policy tenure i.e. how many premiums are yet to be paid?
  2. If the policy is surrendered today, what will be the surrender value?
  3. What is the expected rate of return on the alternate investment option? i.e. if you are not paying premiums, where will you be investing the saved premium amount?

Consider the case of Mr. Shah again, who has an endowment policies with a 20 years tenure. Would it make sense to drop any one of these policies and invest the surrender value and remaining premiums into mutual funds?


See the table below:

Years Endowment Premium Surrender Value of Endowment Term Premium Premium saved & invested in Mutual Funds Return from Mutual Funds @ 12% Benefit / Disadvantage *
0 24,632 - 2,059 22,573 1,821,613 751,613
1 24,632 - 2,059 22,573 1,603,867 533,867
2 24,632 24,893 2,059 22,573 1,600,877 530,877
3 24,632 51,354 2,059 22,573 1,588,464 518,464
4 24,632 69,138 2,059 22,573 1,504,721 434,721
5 24,632 89,341 2,059 22,573 1,431,511 361,511
6 24,632 112,249 2,059 22,573 1,367,515 297,515
7 24,632 138,147 2,059 22,573 1,311,429 241,429
8 24,632 167,422 2,059 22,573 1,262,400 192,400
9 24,632 200,422 2,059 22,573 1,219,362 149,362
10 24,632 237,516 2,059 22,573 1,181,352 111,352
11 24,632 274,896 2,059 22,573 1,135,863 65,863
12 24,632 316,940 2,059 22,573 1,095,690 25,690
13 24,632 364,504 2,059 22,573 1,060,870 (9,130)
14 24,632 418,623 2,059 22,573 1,031,454 (38,546)
15 24,632 480,461 2,059 22,573 1,007,348 (62,652)
16 24,632 555,533 2,059 22,573 994,972 (75,028)
17 24,632 640,292 2,059 22,573 984,875 (85,125)
18 24,632 735,995 2,059 22,573 976,829 (93,171)
19 24,632 844,008 2,059 22,573 970,571 (99,429)
20 Maturity Value incl. Bonus (Rs.) 1,070,000        

* (Return from MF minus Endowment policy Maturity Value)



The premium paid for the endowment policy is Rs. 24,632 per year. The premium paid for an equal sum assured (Rs. 5 lakhs) term plan is Rs. 2,059. The difference is Rs. 22,573 of additional premium every year.


The table above examines whether it makes sense for Mr. Shah to drop the policy and invest the surrender value received and the remaining premiums (that he would have paid) into mutual funds, assuming a return of 12% per year from the mutual fund.


Consider Year 7, the year of his 8th premium (as the count starts at Year 0).
If he surrenders the policy in this year, he will receive Rs. 138,147 as the surrender value. He can invest this surrender value and also invest the remaining premium amounts (Rs. 22,573 per year for the remaining years) into mutual funds, and the money he invests would grow to Rs. 13,11,429 by the end of the 20 year period. This is a surplus of Rs. 2,41,429 over Rs. 1,070,000 what the endowment policy would have paid him.


Now consider Year 17 i.e. the year of his 18th premium.
If he surrenders today, he will receive a surrender value of Rs. 6,40,292. He can invest this corpus and the remaining premiums into mutual funds, and the corpus accumulated within the next 3 years would be Rs. 9,84,875. This is less than he would receive is he simply continued with the endowment policy. The benefit of continuing the policy is Rs. 85,125.


In this particular case, the break-even year was Year 12. If he surrendered anytime up to and including Year 12, it would make financial sense for him to drop the policy and invest the surrender value and remaining premiums into mutual funds.
Anytime after Year 12, it would be more financially prudent to keep the policy.


Your Action Plan

Now you know exactly what a traditional policy is all about. If you have these policies, then depending on how long you have had it, what the surrender value would be, and what rate of return you would get on your alternate investment, you can decide whether you would like to keep the policy or not.


Else, you can always speak to your financial planner, who will create a customized insurance plan for you. And remember – with a straightforward term plan, you don’t have to worry about whether your money is being effectively utilized. A term plan really is the best life insurance a person could have.

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29  Responses to
  • SIVAKUMAR S G
    Updated on
    Jan 25, 2011
      Your article about ENDOWMENT / MONEY BACK  policies is highly misleading.  These traditional policies provide risk cover to the policyholders which any MUTUAL FUND does not.  Are you sure that all MUTUAL FUNDS,  will double within a span of three years?.  There are many funds which are below the purchase price, which has caused heavy loss to investors.  Insurance policies (Endowment / Money Back) have given good returns if premiums are paid till the term of the policy that too with risk cover 
  • KR.LAKSHMANAN
    Updated on
    Jan 25, 2011
      sir everything regarding returns are ok. but there is nothing wrong in having a tradational or endowment longterm policy in one s portfolio or even a life policy. ( as it protects in old age also ). eventhough  the endow plans does nt  assure returns but some returns & peace in the case LIC OF INDIA with a goverment backing.sir is there any assurances  about the returns in the mutual funds in case of bearish stock markets , vanishing companies ,scams, fund manager switchover ,poor fund perfrmances, world markets turblences   etc.
  • Swapneel
    Updated on
    Jan 25, 2011
      Overall, this is a good article which touches upon the benefits of term plan over endowment plans. Also, for people who have existing endowment plans, the comparison of surrender values with investing remaining premiums in mutual fund looks good. However, after the break-even Year 12, you have mentioned that it would be more financially prudent to keep the policy i.e. keep paying premiums for the policy.
    In my opinion, if the policy is anywhere between the 12th and 16th year, it should be made "paid-up" and the premiums should be invested in mutual funds. This would  probably yield more returns than continuing to pay the insurance premiums.
  • Manish
    Updated on
    Jan 25, 2011
      Mr. Sivakumar
    The author has allocated Rs-2059 for buying a term plan for a similar amount your endowment plan provides, so risk is covered. If you see the returns of mutual funds from a 5 year or 7 year perspective the have provided double digit returns. So as long as you stick to the right fund and keep reviweving them regularly MF will anytime provide better returns. If you want better security for your money I still thing PPF + termplan will give better returns than endowment policies.

    Author
    This is a very good article , few years back I had bought an endowment policy but a stopped paying from 2nd year onwards though I lost the entire 1 year money that I paid , I still think I did the right thing.
  • Saurav
    Updated on
    Jan 25, 2011
      I do agree with the writter of the content.

    Fluctutuations, switch over etc becomes immaterial when your horizon is more than 15 years subject to you choose the fund which continously performing in 10 years horizon. For Eg. HDFC Equity, HDFC top 200 to name a few.


  • Shanmugasundaram
    Updated on
    Jan 26, 2011
      Wonderful article. Actually all LIC agents should read this and stop cheating the customers.
    Endowment policy -Useless policy. Neither good insurance nor good investment.. 
  • SACHIN BAINDUR
    Updated on
    Jan 26, 2011
      Your article is quite misleading. Insurance should not be compared with Mutual funds.Mutual funds are for investments & insurance should be bought for pure insurance/risk cover.Your article about ENDOWMENT / MONEY BACK  policies is highly misleading. 
  • PersonalFN Financial Planning Team
    Updated on
    Jan 27, 2011
      Dear Readers,

    The article above explains how taking a term plan for life cover, and mutual funds for investments, is a more financially prudent option, rather than taking a traditional policy. This is due to the difference in returns over the long time horizon.

    For any queries, please do write in to us, we would be happy to help.

    Thanks and warm regards,

    PersonalFN Financial Planning Team
  • GURU
    Updated on
    Jan 27, 2011
      Th analysis is veru good. One is not sure about the returns in the Mutual fund sector. Best direction will be invest 40 % of your money in the insurance (better in Money Back policy, the returns of which you can invest in mutul funds) as the insurance has the risk coverage also. To offset the non-performance MFs (as one cannot always be 100% sure that all his MF invetsments will yield 12% returns contiuously), 60% of the savings can be invested in MF. Even if the verage percentage woks out to be 7%-8%, it is still better than the Insurance sector.
    40% for the risk and 60% for the growth could be a better investment strategy.

    Guruchandran
  • Deepak Arora
    Updated on
    Jan 27, 2011
      I totally agree with the author of this article. This is very true that Endowment plans or Money back plans are totally waste of money. As per my understanding, one should go for 'Term Policy' which is available at very low premiums and invest your money into a PPF account which will give you a guaranteed 8% return. Policies always give return of 5 % to 6 %Remember we take insurance policies for risk cover. These are not meant for savings purposes. Thanks
  • N.M.R.Shreedhar
    Updated on
    Jan 27, 2011
      Good article. The article clearly elaborates the better returns from a Term Plan+MF combination over an Endowment plan. In my opinion, the average  human psyche sees a Term Plan as a "waste of money"  as there is no return ( most of us conveniently forget that we may die during the term of the policy) whereas an endowment policy gives us returns if we outlive the policy, so we don,t feel cheated-- I think this is the primary reason why Endowment policies are so appealing.
  • Jyoti
    Updated on
    Jan 28, 2011
      All plans which have savings component are "WASTE OF MONEY".The purpose of life insurance is "LIFE COVER".Does any general insurance plan have savings component?It is high time  to "BAN" all plans except "TERM PLANS" and that too should be sold "ONLINE ONLY" by respective companies.WE SHOULD STOP THIS DEBATE ONCE AND FOR ALL.
  • Amitav Pal
    Updated on
    Jan 28, 2011
      Still a long debate... But how can we compare Traditional plan Vs MF + Term Plan. We all know that traditional plan's returns are conservative. It will best if we compare ULIP Vs MF+ Term plan. And, am sure on 11th year ULIP gonna give maximum return as compare to MF+Term. So no need to go for a debate where both the financial instruments are different. MF in its way is good and Traditional Plan are the best.
  • nagesh
    Updated on
    Jan 29, 2011
      A good article. ULIPs also waste of money. Instead of ULIPs one can take term + long term mutual funds in SIP system.
  • Jayant Singhal
    Updated on
    Jan 29, 2011
      Dear All,
    This discussion regarding endowment/moneyback policies vs. ULIP's/MF's + term cover is endless. It totally depends on the risk taking capacity of a particular individual at a specific age. It cannot be said that ULIP's/MF's + term cover is the best. Term plans are available in the market at cheaper rates but every insurance company does not have a good "Claims paid ratio". Investors need to have a meticulous reading of the risks covered under term plan. Further, some MF's do not perform even at par with the Indices & their NAV may go down with the fall of index but they do not recover well even if the index has recovered. Some MF may totally outperform the Index also. Investors need to constantly keep an eye and keep on churning their investments regularly.
    Question for @ Personal FN planning Team:-
    How good is a endowment policy named "Jeevan Amrit" which requires premium paying term of only 3 years (57,321+28,661+28,661) and risk cover of Rs. 15 lacs and tenure of 30 years. At maturity, on surviving of the life assured, premiums paid + bonuses will be paid.
  • PersonalFN Financial Planning Team
    Updated on
    Jan 29, 2011
      Dear Mr. Singhal,

    The Jeevan Amrit policy as mentioned by you, paying premiums for only the first 3 years, and continuing to maintain risk cover, and receiving a maturity value (of premium plus bonuses which will come to approximately Rs. 3,20,000) at the end of the 30 year period, should be yielding you a return of approximately 3.57% per annum. We would need further details to give you an exact figure.

    If you have not taken the policy, it is not advisable to opt for it. You can instead go for a term plan (which would cost you Rs. 5,000 per annum for 30 years for the same sum assured) and invest the saved premium amount into well researched mutual funds.

    If you have already taken the policy, then depending on how long you have had the policy, it needs to be assessed whether to continue or drop it.

    For a personalized recommendation, we would be happy to assist you. please do write in to us at info@personalfn.com, or simply call us at our offices.

    Thanks and warm regards,

    PersonalFN Financial Planning Team
  • Neelam Kundani
    Updated on
    Feb 02, 2011
      Hi,

    Very nice chart, i really appreciate.

    If you could please send same type of chart comparing with investment in PPF instead of comparing with MF (12%) on my mail ID: neelamno1@yahoo.com

    I would like to stop my few small policies, if PPF is really benificial than LIC

    Neelam Kundani
  • Mr Prabhakar
    Updated on
    Feb 07, 2011
      R/sir,

    Very nice chart, i really appreciate.

    If you could please send same type of chart comparing with ULIP product (whwrw the charges for first three years are very heavy ) instead of comparing with MF (12%)  
  • Sandeep
    Updated on
    Feb 14, 2011
      Either Siva Kumar seems to be an Insurance Agent or he lacks financial acumen !!!
  • Amit
    Updated on
    Mar 15, 2011
      I really liked the article & infact I think it is an eye opener for me.I am a engineer & have no knowledge as to how to go about investments & is totally dependent upon insure agents, financial planners. etc. Ok now I have bought a endowment plan ( only 1 premium  paid) with a term of 23 years. can someone advice whether to continue or stop right now & invest in MF's etc..
  • TD
    Updated on
    May 11, 2011
     

    I’m having LIC’s Jeeval Saral (165) endowment plan.

    I have purchased policy on 12-02-2011.

    Yearly Premium : 18015/-

    1st year premium paid (18015/-).

    Sum Assured : 375000/-

    Term : 35 years.

    Birth Year : Aug-1985.

    Now after going through Person FN article, I decided to switch off my endowment plan and want to take traditional Term plan with investment of balance premium in PPF/VPF.

    I want to know followings:

    (1)    Is it beneficial to switch off endowment plan now??

    (2)    I want to invest balance premium (out of total 18015/- , 10015/-(in to traditional term Plan) & 8000/- to PPF/VPF

    (3)    Comparison of endowment maturity benefit (SA+Bonus) with equal term and above amount of investment in PPF/VPF??

    Heartily request to Personal FN to answer my query and guide me suitability.

    Regards,

    TD

  • Shanmugasundaram
    Updated on
    Jun 21, 2011
      I think author is a Mutual Fund agent. first thing insurance is not a investment tool.

    Don't you think its injustice comparing mutual fund with LIC traditional plan.

    Read this....
    Limited amount of money available to invest, need insurance and also want to invest in a mutual fund or similar investment? ULIPs could be the ideal option for you. Unit Linked Insurance Plan (ULIP) is an insurance policy where funds are invested in the capital market. You are sure to find insurance companies vying for your attention with ULIPs in new and attractive packages. ULIPs come with both insurance and investment components. If you’re open to high risk investment options, you can shun the traditional endowment plans for ULIPs which invest the entire principal sum in equities.
     
    The response to ULIPs has been impressive ever since its launch and it has brought good returns for many investors. If you choose ULIPs you enjoy tax benefits under Sec 80C. You can also switch between equity funds and debt funds or vice versa without fearing any entry or exit charges as in the case of Mutual Funds. However your investment in ULIP’s will work only if you stay invested on a long term (more than 10 years).
     
    Have you decided to invest in ULIPs? Here’s a three-step plan to find the right ULIP for you.
     
    Understand ULIPs
     
    Gather as much information as possible on ULIPs that you are considering investing in, understand how they work and seek advice from financial experts on potential best and worst case returns if the need be so you don’t encounter nasty surprises later.
     
    Consider your needs and risk profile while choosing ULIPs
     
    In a volatile market situation, you can invest in ULIPs by way of Systematic Investment Plan (SIP) and turn the volatility of the market into an advantage for you. Keep your long term financial goals in mind while choosing a ULIP portfolio so you aren’t affected by short term swings in the market. If you are a low risk profile investor, then pick debt heavy ULIPs. If you’re younger or have a higher risk profile, then get into an Equity version.
     
    Compare and choose ULIPs
     
    While choosing ULIPs you must find out how debt, equity and balanced schemes are performing. What are the expenses you will incur with the choice of ULIPs? How many times can you change the asset allocation of your ULIP account? Does your ULIP offer you a minimum guarantee? Find answers to these questions before you choose a ULIP.


  • Daulat Khatale
    Updated on
    Jul 02, 2011
      This it totally misleading article as many of commentors said. Author has just assumed returns on mutual fund @ 12% p.a. and it is not guaranteed. In last four years, particularly MF and ULIPs has not paid any profit to it's investors, so assumption is totally wrong. Secondly, Endowment plans gives other benefits like accident death, disability benefit, waiver of premia and guarantee of bonuses, where term plan doesn't give all this.
                   In my opinion, Mutual Fund or ULIPs are best for investment for short period and not for long term planning and Endowment Plan are always better for long term and secured planning.
  • Hari
    Updated on
    Jul 12, 2011
      Mutual funds delivering 12% to 15% p.a is a very common assumption being made by financial advisors these days.Is it really a valid assumption? Even in the long term say 5 years,10years,15 years this may not be true.Moreover Indian stock market is a FII driven casino and nothing more than that.The most advertised SIPs are also not always beneficial. If you are lucky to get quick return from markets , keep a target in mind and safely move the capital to fixed income. Definitely you will get another down cycle to get back to markets.

    I agree that term policy is the best insurance product and ULIPs are the worst - never ever invest in ULIPs.
  • Pankaj Seth
    Updated on
    Oct 16, 2011
      Your Article on taking of Mutual funds over old traditional endownment or money back plans is best. I have checked the posts are very old, I personally believe that MF and Insurance both are part and parcel of investment bucket. Both of them cannot replace each other. Mutual funds are highly risky element and every investor cannot absorb the same as India is already passing thru a very tough phase of growth. I feel considering old age benefits provided from the govt of India or sudden death benefits to families, Insurance is the best method to save.  
  • Rajes
    Updated on
    Dec 19, 2011
      Author correctly analyzed and tabulated, Term policy+MF or Term Policy+ppf will always provide better returns than the traditional Endowment policies
  • Makaela
    Updated on
    Jan 19, 2012
      I really needed to find this info, thank God!
  • Pharmk859
    Updated on
    Apr 02, 2013
      Hello! interesting site! I'm really like it! Very, very good!
  • Asha Nanda
    Updated on
    Mar 26, 2014
       

    Given the obvious attraction of a Guaranteed Savings Plan product you can expect more plans to line up in the market and given the lack of disclosure on net return, your job first is to calculate the net return on the policy. Take the help of online calculators or simply consult a financial planner. Keep in mind that most long term guaranteed products will offer conservative returns and entail a cost for that guarantee.


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