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) .

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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 .

487 CommentsAdd Comment

  1. ManojSaha

    I am 23 yr old now. 2 weeks ago i bought HDFC click2invest ulip plan at a premium of 3000.00/month for 15 years. They promise me that there is only FMC and mortality charges applicable, even there is no Service Tax till the end of my policy. My qsn is, is it okay for me? Is it best? or anything you can suggest me.

  2. PuneetWadhwa

    Hi Mahish,

    Firstly I would like to appreciate about the important information provided at your website. I have gone through the information provided at your blog and understand that endowment policies are not good at all. Now I am really having concerns for 2 LIC policies for which currently I am paying. Details are as below:

    Policy #1
    Policy Name: Endowment Assurance Policy (T No 14) – Normal Premium Paying Policy
    Policy Term: 16 years
    Yearly Premium: 12,468/-
    Commencement Date: 24/01/2011
    Sum Assured: 2 Lakhs

    Policy #2
    Policy Name: Jeevan Saral Policy (T No 165) – Normal Premium Paying Policy
    Policy Term: 15 years
    Yearly Premium: 6,005/-
    Commencement Date: 23/12/2013
    Sum Assured: 1.25 Lakhs

    Kindly Suggest should I continue with them, surrender them or make it paid up.

    Regards,
    Puneet Wadhwa

  3. Saurav

    Hi Manish,

    I have an LIC endowment plan “New Endowment Plan – 814”. I have taken this policy six months ago and my age is 29 now. From last couple of days I have concern regarding this plan and i think it is a waste of money.

    Please find the below extracts from policy document:

    Name: Lic’s New Endowment Plan – 814
    Sum assured: Rs. 11, 00000.00
    Base Premium: Rs. 68, 833.00 yearly
    Policy term: 16 yrs
    Frequency: Annual
    Total maturity benefits: Guaranteed +Illustrated benefits [approx. Rs. 23, 00000.00].

    Now my questions are:
    Is it advisable to continue this policy or not?
    Should I surrender it or just stop paying premium?
    Should I continue for three years?
    I think to continue with this policy is just waste of money and time!

    Thanks

  4. mayur tambe

    Hii sir,my name is mayur tambe.n my age is 25 yr. i brought a endowment policy but i want to cancel it,now my policy is in free look period so what reason i mention in free look period form.because i realize that i brought a wrong product..

    Name : MetLife Endowment Savings Plan.
    • Sum assured : Rs 285754
    • Base Premium : Rs 25121 yearly
    • Policy term : 15
    *premium pay term:10 yr
    • Frequency: Annual.
    • Total maturity benefits : Guaranteed +Illustrated benefits ( 4 % – 221984and 8 % – 246186). Plz guide me…

  5. Nakul

    Hi Manish,

    Firstly I am a big fan of yours.

    Now having said that I should have not done this crime of opting an endowment plan. But the crime has been committed (already fired the bullet). I have an endowment plan of “Birla Vison Plan”. When I was 23 years old just got my job . So started reading personal finance and came to know we should first get some good life and medical insurance. The only mistake that I did is to not read the definition of “Good”. I called one of our family insurance advisor(Agent). And the rest is history. Details of my policy.

    Premium ; 30K annually.(that includes riders of 4K, so actual premium is 26K or even lesser)
    Term: 30 Years
    Cover: 8 Lakhs
    Maturity Value with 6% and 10% as per illustration : 1,992,300 and 4,191,360.
    Already paid : 90K
    Surrender Value : 15K
    Death Benifit: (8L + Fund Value).

    Now my question is:
    Should I surrender it or make it paid up. I think to continue with this policy is just like committing suicide now. And the second question is If i surrender my policy what will be implication on Tax deduction that i took under 80C for past 3 years. Is it going to affect my CIBIL score. I am planning to buy a Flat so I will be applying for home loan as well.

    With simple calculation of Compound interest. If put the surrender value in an instrument having returns of 7.5 for next 27 years it will give the final value as 105710.91. So I think if I put this amount in some good ELSS it will be much more bigger.

    Please give me your best suggestion on this case.
    Nakul

  6. Krishna

    Hi Manish,
    I would really appreciate your suggestion with the following endowment policies that I am paying for my parents. Should I surrender or make them paid-up? I know already that continuing to pay is not a good option after reading your article.

    LIC – The Endowment Assurance Policy (T.No.14)
    Commencement Dates – 25/06/2013(Mother), 18/6/2013(Father)
    Sum Assured – 2 Lakhs each
    Policy Term – 16 years
    Premium – 13845 (Mother) 15970 (Father)

    I just recently paid the 3rd premium for these in June.

    Thank you,
    Krishna

  7. mani

    Hello Friends,

    Need advise on one of the questions for my friend, who works in an IT MNC in Bangalore and is currently 23 yrs old.
    He was been asked to take a policy whose details are as mentioned below through one of his relatives.
    Please find the below extracts from the policy document.

    • Name : MetLife Endowment Savings Plan.
    • Sum assured : Rs 312,300
    • Base Premium : Rs 30,000 yearly
    • Policy term : 10 yrs
    • Frequency: Annual.
    • Total maturity benefits : Guaranteed +Illustrated benefits ( 4 % – 330,890 and 8 % – 380,405).

    Questions :
    Let me know whether it is advisable to take this policy.
    Is there a lock in period OR whether premature withdrawal is allowed.
    Can this been shown for tax savings in his company. Got to know it can be shown in some 10B/10C but not sure whether this can be submitted for tax savings for his company.
    Is this linked to BSE share market.

    The insurance agent has also said that if he is not interested in the above plan, he can check out for MetLife Money Back Plan – Guaranteed Non Participating Money Back Plan.
    Let me know whether it is advisable to opt in or opt out of the above mentioned plans.

    Thanks.

    • Hi ENISH BAHL

      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

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