Endowment Policies, Plans and its Advantages
Insurance has traditionally been the most popular investment product, though it is facing a tough competition with mutual funds these days. Insurance is mainly considered as a risk mitigation tool, but many people want to buy an investment cum insurance product and endowment policies become a solution for these people like Mr. Vivek from Hyderabad.
Vivek aged 32 had a daughter of 6 years and he wanted to buy an investment product which can fulfil both his investment requirement for retirement and insurance requirement for unforeseen circumstances.
So he thought of buying an endowment policy from ICICI Prudential Life Insurance, ICICI Pru Save n Protect plan with an annual premium of Rs 7296 for a sum assured of 20 Lakhs. which was costing him approx Rs 20 per day.
What are Endowment Policies?
Endowment policies are special type of life insurance policies where the premium paid to the insurance company is partly used for securing your life and partly used for investment purposes to help you building a corpus at your retirement. In other words, Endowment policies offer triple benefit of
- Tax Savings
Declaration of Bonus
Endowment policies may declare annual bonus which is generally expressed as a percentage of total sum assured. This annual bonus declared is paid out of the returns generated by the endowment policy over a period of time. The bonus percentage paid is normally 4-6% with most of the endowment plans.
For example, if your insurance policy sum assured is 5 Lakhs and the insurance company declares a bonus of 4%, you will get Rs 20000 as annual bonus from the policy as and when declared by the company.
Normally the bonus percentage declared by company ranges from 4-5% or even less than that – as majority of the money is invested in debt products insurance companies where annual returns are not more than 8%.
Secondly the bonus declared by these endowment plans doesn’t compound itself. Suppose the insurance company declares bonus of Rs 30 per 1000 of sum assured after 2 years of policy (total term of endowment plan being 20 years) and you received a bonus of Rs 30,000, now this Rs 30,000 would remain Rs 30,000 till the maturity of the endowment policy.
If it had compounded – the Rs 30,000 could have been Rs 1.19 Lakhs after 18 years.
If the policy holder dies during the term of the endowment policy, he will get the sum assured. If the policyholder survives till the date of maturity, he will get the sum assured plus the accumulated bonus till the date of maturity. It is unlike a term insurance policy where you don’t get a penny if you survive during the term of the policy.
This makes endowment polices a popular product in the insurance segment. Maturity period of endowment policies vary from 10, 15 or years which largely depends on company to company offering endowment products.
What does an insurance agent hide from you?
Every person works for himself not for others.
1. The hidden fact about endowment policies is that it may or may not declare bonus after every year. Generally life insurance companies prefer to accumulate annual bonus and paying it on the maturity of the policy rather than paying every year as in the case of stocks where dividend declared is paid immediately.
2. And secondly the bonus paid under endowment policies is not compounded annually which impacts the policy returns in the long run
If as per the above example stated, if the endowment policy declares 4% bonus every year and it gets accumulated every year for 25 years, so you will get 100% absolute returns (25 * 4%) on sum assured after 25 years. It essentially means you will get the sum assured amount of Rs 20 Lakhs and a return of 20 Lakhs which makes your maturity value to Rs 40 Lakhs
You can’t expect a return of more than 6-6.5% from endowment policies in the long run which are stated as 10-15% by life insurance agents while selling endowment policies.
Endowment policy is a structured product which is a mix of insurance and investment and offers a good investment product for people who are looking for tax savings, investment and insurance in a single product without any hassle.
Some of the popular endowment products offered by insurance policies are LIC Jeevan Anand Policy and ICICI Pru Save n Protect plan.
On the flipside, endowment plans are considered to be expensive insurance plans if we are comparing it with term insurance. The premium rates of endowment plans are almost 8 times more expensive than term plans.
You are recommended to use 1/8 of the premium in buying term plans and utilise remaining 7/8 premium by investing in balanced funds where you can expect 12% annualised returns.