Why Endowment policy must be avoided

Today we are going to see why Endowment policies should be avoided in any portfolio and how other things are much better than Endowment policy with the same cost .

The assumption is that you understand what are Endowment policies and What are Term Insurance Plans , if you dont know click here to read about it

A look at the Endowment Policy

An Endowment policy would look like this for a 25 yrs old
Tenure : 30 yrs
Yearly premium : 31,000
Sum Assured : 10 Lacs
Maturity amount : 23.1 Lacs lacs ( this you get when you survive full tenure , It includes the sum insured + Bonus accrued)

This data is from website of an Insurance company .

Q . How much money to be paid every year? How much will the person get in case of Death or Survival ? What are the Risk factors ?

Ans :

Tenure : 30 yrs
Money outgo : Yearly 31,000/yr
Money received In case of Death : 10,00,000
Money received In case of Survival : 23,100,000
Risk : Virtually no risk (The only risk is when the Insurance company goes bankrupt)

What is the interest earned on this investment ? 31,000 per year for 30 years becomes 23,10,000 .

Annuity formula is :

Maturity value = Amount paid per year * [ {(1+r)^n – 1}/r ] * (1+r)
Here n = 30 years
and r = rate of interest earned

Putting all these values

23,10,000 = 31,000 * [{(1+r)^30 -1}/r] * (1+r)

The value of r which satisfies this equation is 5.4 . Which means that the interest earned by the investment in Endowment policy is mere 5.4% , which is truly pathetic by any standard in India at least . There is no investment product known which is known to pay so badly .

The reason why people feel that endowment policy are so good is that they also get insurance cover ( which is virtually useless because its so less that it does not even cover the financial dependents to even a fraction of what they need in reality)

So can we mix Insurance + investments product which can be better than supremely better than Endowment policies and still cost the same( or even less) .

Liked the post , Subscribe to Get Posts in Email or RSS Reader

Now let us see that by spending same amount (30,000 , 1,000- less than the endowment policy) every year for 30 yrs , can one achieve better than this .

1. For Safe Investor (Let us first see a almost 100% safe way to do this)

Term Insurance of 30 Lacs for 30 yrs : 6k
Investment of 24k in PPF for 30 yrs : 30 Lacs (this is assured returns , as its invested in govt backed PPF , which gives 8% post tax return)

Amount invested = 30,000 per year for 30 years (same as Endowment policy)
Amount received on death : 30 Lacs + investments done in PPF
Amount received without Death : 30 Lacs (investments)

2. For Aggressive Investor ( A person who can take more risk that the former one)

Term Insurance of 70 Lacs for 30 yrs : 14,157
Investment of 17,843 ( 30000 – 14157) in ELSS for 30 yrs assuming 15% CAGR : 92 Lacs

Amount received on death : 80 Lacs + investments done in ELSS
Amount received without Death : 92 Lacs (investments)

Equity investments for long term are almost risk free.

So , we can see here than in any case term insurance + MF is supremely better than Endowment policies .

Solution for People who have taken fresh policies

People who have already taken fresh policies and have not completed 3 yrs should just forget there payments and stop there premium payments. The profits of switching from Endowment to “Term + MF” will be far greater than the loss from leaving Endowment policies .

Solution for People who have completed more than 3 yrs

Either convert your policies to Paid-up or just surrender your polices and take the Surrender value (take your call on what you are comfortable with)

Solution for people near the Maturity

You have almost paid most of the installment , so better stick with it , but don’t forget to insure yourself to a respectable cover through term insurance

Summary

Endowment policies according to me are totally incorrect and worst product i have ever seen (ULIPS are not far behind) . It is structured and presented in such a way that investors are attracted to it . Agents present them in such a fancy way and give judgements which make these policies look like must have products.

Disclaimer : The exact figures can differ , this is just a demonstration of how Endowment policies can not be better than Term Insurance + MF combo . All the Insurance premium are for Aegon Religare Life Insurance and Mutual funds payments are considered monthly (amount/12) .

All the view on this article are personal, some people may disagree with it which is totally acceptable .

471 CommentsAdd Comment

  1. jogendrak

    Hi Manish,

    I am truly enlightened with your knowledge in this field. Thanks a lot for the good work you are

    doing for the society. I need your suggestion on one of my policies.
    I am in bit of a dilema whether to surrender or discontinue my policy “Max Life Life Partner Plus

    Limited Pay Endowment to Age 75 Plan” Tenure – 20 Years. This policy has Total Sum Assured of base plan and

    term rider (if any) : RS 3,99,802. I have already paid 4 premiums for this policy. However due to

    some challenges, I will not be able to further continue with this policy.

    I enquired and got to know that even after paying more than 1 lac towards premiums, the

    surrender value is somewhere arpund 39 K if I decide to do so.

    Please advise what should I do in this case ?

    Should I go for surrender ? or Is there any other option to save maximum on my hard earned

    money ?
    How about if I just stop paying the premium and discontinue the policy ? Please help me with the

    PROs and CONs of these options.

    Thanking in advance
    Jogendra

      • jogendrak

        Hi Manish,

        The “Non Forfeiture Option” mentioned for my policy is “Reduced Paid Up”. I am not quite sure what this means ? Can you please provide your insight on this ?

        Also by discontinuing the premiums, will it be paid up automatically or should I have to write them a mail in order to make it paid up ?

        Thanks in advance
        Jogendra

  2. Ankit

    Hi Manish,
    May I have some contact information on my email for taking professional Financial Services.

    Regards
    Ankit

  3. Muchhal N

    Dear Sir,
    I have also taken New Endowment plan of LIC in Feb 2015 for annual premium of 70K. I am now realizing the interest/return is very less. So planning to surrender/quit. Any way to get some money back??…Can it be exchanged with any other good policy of LIC? WHAT are other good options to invest e.g., PPF, MF, or Religare. someone suggested Future protect cum insurance plan?? how is it?? any other plan of established Pvt insurance cos.

  4. Akshay bahl

    Sir I forgot to mention above that it’s a money back policy and I’ve been promised a return of ₹1.5 lakh every 5th year..
    Thanx
    Akshay

  5. Akshay bahl

    Dear sir,
    1. I’m an army officer 36 yr and I’ve gone through ur comments on this site and have come to conclusion that EA policies are a waste of money n efforts, thanx for this.
    2. Being an army officer we are moving very frequently sometimes to inaccessible areas hence are not Updated with the current financial happenings..
    3. I’ve been misinformed and sold a LIC money back policy T-T 93-25 with sum assured of 10lakhs for which I’m paying an yearly premium of ₹55066/- which is paid out of my DSOPF directly.
    4. I’ve paid 2 premiums and the third is due in Jul. as I’ve understood, if I surrender the policy I’ll lose 1.1 lakh.
    5. Please guide should I continue paying the third premium or stop and incur the loss..
    6. If I stop than how should I go about my investment.
    Waiting for an early response thank you
    Regards Akshay

  6. rohan

    hi,

    i am 25 yr old and my annual income is 4.5 lacs. I want to take some policy which would give return as well serve the purpose of pension lately.
    Kindly suggest some LIC policy.

    Regards,
    Rohan

  7. K V Ravichandran

    I started an Endowment Assurance Policy Table 14 in 1999. The maturity is July, 2016. Sum assured is Rs.1,00,000/-. Annual premium is Rs.6,326/-. What is the maturity value roughly.

    • Hi K V Ravichandran

      The best answer you can get only from the agent you invested through or just contact the company. The thing is your case is a bit personalised and other than company, no one can give accurate information

      Manish

  8. Murali Madugula

    Hey folks, I am planning to take up Endowment Insurance plan as suggested by on of my colleague. Seriously, I don’t have an idea of what Endowment plan actually do?

    Can you please walk me through the process, risks, benefits, things I need to do, payment options whatsoever related to Endowment insurance?

    Hoping to listen from you soon.

    Regards,
    Murali

  9. Deepali

    Hello Sir,
    I have taken a LIC Endownment Plan (table no. 14) in 2010 at the age of 28. There are 7 policies, each sum assured 2,00,000 and term is 20, 22 , 24, 26, 28, 30 and 32 yr with total premium of 51k yearly.
    I have below queries:
    1. which bonuses are applicable to my policies at maturity? (from above GA, LA, FAB)
    I can see only vested bonus online. Can you please help me to calculate maturity amount?
    2. how surrender value is calculated in this case as i have paid 5 premiums?
    3. Is it ad visible to surrender theses policies and reinvest the money to get better returns?

    Your advise is valuable.
    Thanks in advance!

  10. basheer

    I have an endowment policy, table 14 and completed 5 and half years already by monthly debited Rupees.1595/-. Can you please assist me whether I surrender that policy or if not how much amount I got at last, since the total term of the above said policy is 35 years.

  11. hi manish
    i taken marriage endowment policy table no. 90 , and already i paid 2 -years , i am paying 31000 per year, but policy agent told me you only pay up to 10- year , after that 17th year lic will return lumsum 17 lakhs, is it correct?
    what i will do, can i stop this policy?

    please assit me,

  12. sameer

    Sorry for the above post, I have maintained my portfolio in excel so just copied it.
    Here is my portfolio in better way –

    1>Birla sun life tax relief 96 fund SIP – 3000 p.m – started in july 2008. Reedemed 3 years over investment – 117,000 investment redumption amount 255,000.
    Current investment 120,000 current value -201,588.

    2>Uti Mid cap fund – SIP- 1,000 p.m – started in feb 2011, amt inv till date 48,000, redumption amount – 102,000. Sip to continue till Jan 2016.

    3>Icici Pru life stage pension – 20000 P.A, amount inv till date 140000.Start date – may 2008 End date – may 2030. Current value – 234365

    4>Aviva Saveguard ULIP – 30000 p.a, amt inv till date 270,000. start date – dec 2006, end date dec 2021. Current value – 345798.

    5> LIC Jeevan saral Endowment plan- 6000 p.m for self & spouse – started in april 2012 end date – march 2047. aprrox 15 lacs insurance cover

    So as I read your blog ULIP & Endowment both are bad and I made both mistakes.

    I also have home loan out standing liability of approx. 23 lacs.

    I wanted to ask 2 questions. One obliviously when can I get rid of both ULIP & Endowment plans.
    Second is how can I diversify my portfolio well and also reduce my home loan liability.

    Thanks
    Sameer

  13. sameer

    Hi Manish,

    Please find my portfolio below. I have been fooled by ULIP+endowments now really wants to make better decision

    Policy Provided Type Frequency Amount of inst total prem paid Total Current Value Sum assured Redeemed amount Profit booked star date end date
    Birla sun life ELSS Monthly 3000 120000 201588 7/21/2008 7/20/2035
    Uti Mid cap Fund MF Monthly 1000 47000 2/25/2011 1/25/2016
    Icici Pru life stage pension Pension Annual 140000 234365 5/17/2008 5/17/2030
    Aviva- ULIP ULIP Annual 270000 345798 225000 12/11/2006 12/11/2021
    LIC Jeevan saral- self endowment Monthly 5000 4/1/2012 3/31/2047
    LIC Jeevan saral- spouse endowment Monthly 1000 4/1/2012 3/31/2047
    LIC Jeevan saral- kid endowment Annual 4804 3/9/2013 3/9/2038

  14. Pankaj Gupta

    I have 25 years money back term insurance plan from LIC, want to close it as Paid up, how to do that and should I do that..I am not thinking it is benefitting me

  15. Bhanu

    Hi Manish,
    need ur expert advice. I have one LIC pension plan. I am investing Rs.27600 per year in that. On retirement i will get a sum of Rs.17,00,000 plus pension of Rs.22,000 per month. I want to invest more. My agent suggested LIC enodwment plan. After reading your article i am thinking against it. Pls suggest me a good plan. I am also investing in SIP. Should i go for more mutual funds or ELSS or PPF. I am confused among these. Pls suggest a plan which is good for me in long run. I can invest upto 6000 more per month.

    Awaiting your response. Thanks for your time.

    Regards
    Bhanu

  16. Vasan

    Hi Manish,

    I am not sure how exactly to calculate Interest rate of return.

    We invest 5 lakhs over a period of 5 years and the return we get is 5 Lakh + 3.75 lakh. So per lakh we are getting 75000 back its almost 75% returns over 5 years.

    Regards
    Vasan

  17. Vasan

    Hi Manish/Experts,

    SUB:- Need your advice on decision making to invest in a Endowment Plan

    I know that Endowment plan not the the best when Insurance is considered as Investment. Just look at the below plan and let me know if this is OK for short term investment (5 years)

    Aegon Religare Premium Endowment Poicy

    1 lakh per year as a premium, so 1L * 5 Yr = 5,00,000 (Sum assured amt)

    Gurantee bonus as 5 % from sum assured amount, 500000*5% = 25000(every year), for 5 years = 5*25000 = 125000
    Non Gurantee bonus as 5 % (but they gurantee) from sum assured amount, 500000*5% = 25000(every year), for 5 years = 5*25000 = 125000 (They are investing this money in GOVT INFRA BONDS)
    Begining of 6th year = 25% from Sum assured amt ==> 25/100*500000 = 125000 (giving as Tr bonuss)
    25% for 5 yrs, and 50% for 10 yrs
    atlast we will get the total amt as below
    500000 – Sum assured
    125000 – Gurantee bonus
    125000 – non gurantee bonus (But the amount 125000 is minimum they quote max is based on perf of bonds)
    125000 – TR bonus (Traditional – TR….)
    ——-
    875000
    ——
    In addition, In case of death ==> thry will provide the sum assured amt(i.e 500000)

    Medical insurance => for 1 lac premium => 4 lakhs medical insurance from IHO (pre existing covered and appplicable for 5 years, not 4 lakh per years, its 4 lakhs for entire 5 years)

  18. swami

    I heard an SBI life’s endowment plan – shubh nivesh plan for 7 years. the agent told me that upon investing 50K for 7 years(sum assured 3,00,000) i get 6.2Lakh in 8th year (4% revisionary bonus + 3% interim bonus + terminal bonus 25542 every year) or i can convert it for pension of 5800 for entire life. i belong to category 1 in your article (Safe Investor). if i invest as safe investor (10K in term insurance ) + 40K in PPF then as per my calculation upon survival , i get 70000 from term insurance and 394795 from PPF which is 464795 which is 1.5 lakh less than the endowment plan. Here endowment plan seems to be beneficial, can i invest in endowment plan, Is the agent cheating me on terminal bonus or on any thing else, please advise.

Leave a Comment