## Why buying an Endowment policy is not a good choice?

Today we are going to see why Endowment policy 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 don’t 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
Sum Assured : 10 Lacs
Maturity amount : 23.1 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).

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 returns )

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.

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Abhilash Balan
3 years ago

Hi, unfortunately I too am a victim of endowment policy. HDFC bank sold me the policy as an requirement to open a locker. As a newly married couple I thought this is also a good investment for future. Little did I realize about the trap. Anyways I am into the eight year of policy out of 12. I pay an yearly premium of Rs 36000 and sum assured is Rs. 319990. Product HDFC SL Money back policy. Should I continue to stay invested. What is the maturity amount expected. Current bonus amount stands at Rs .40419

Thank you

Boney
7 years ago

Hi,

I am an NRI and was suggested the below, just wanted to know if I should go ahead. This is dollar based, I would like to know if NRI has other options to save in Dollars, or any other suggestions.
Yearly Plan – 6878 USD for 5 years. Normal risk cover \$55000, Accidental \$110000
Current Age 31. Returns From 45 to 65 years.
Total payment – \$34391, returns from 45 to 65 \$114042

Boney
7 years ago

Thank you Manish for the quick response
So since its an endowmnet stay away? Can you suggest me something in dollar as currency or is it better to take mf in inr. What should an NRI invest in.

prince
7 years ago

My wife too got trapped (or say cheated) by Insurance agent endowment policy in 2013 with annual premium Rs 30,000 .
Total Premium paid 90000. I am confused whether to continue or not. Insurance phone support are saying you will get only 20% on total premium paid minus 1st year premium amount which comes out to be just Rs8,000.
They also told to visit bank for special surrender value which might be higher.

Which option is better :-
1) Surrender policy now (as it for 10 years term). Does bank’s special surrender value will be higher thna 18000 anyone have idea ?
2) Continue with it . keeping paying 10 year 🙁

thanks,

Gowthaman
7 years ago

What will be the return amount of Lic New Endowment Plan 814?

I purchased the plan this year (2016). I am paying the premium of 89000 P.A (Approximately inclusive of tax), the policy period of 12 years and my age is 25 years old. What will be the return amount after completion of 12 years (maturity period)?

Avinash Sardesai
8 years ago

Good to see a comparison of the option for a safe investor that very clearly shows how bad this investment is, at other places we generally see the comparison with only equty plus term plan.
People do not realise that they are not doing any justice to either insurance or investment by going for such hybrid product.
Thanks.

Aravind
8 years ago

Hi Manish,

This is a gratitude message to you. I am an ardent follower of your blog and most of my time goes by reading and re-reading your articles. I must say that it has increased my financial knowledge and impact of money on our life.

I had a situation today where an agent from and tried to sell a product (endowment, traditional mixup of investment and insurance) and I was able to question her to the extent that she was not able to convince me beyond a limit. This knowledge which I have gained (like many people) is only because of following your blog.

Kudos to the work which you are doing now and I could also see that you are increasing the usability of this blog by creating links for various financial instruments. My very best regards to you.

Kindly keep writing articles and maximize the readership by various means.

vikash
8 years ago

Dear Manish,

I am 28 years old working professonal. I don’t have any policy or insurance.

I am looking for investment. Please guide me for the same.

Thank you

MFernandes
8 years ago

Dear Manish,

I have gone through most of the reviews, I am a parent 50 yrs of age with a 17 yr old son and 8 yr old daughter.

I have sufficient Term insurance but No child plan cover. I intent to take a cover for my daughter for the educational expenses after age of 18

Can you please suggest the best options LIC or otherwise which I can enter into immediately with Premium benefit waiver in case of parent death.
Thanks and Regards,

rakesh
8 years ago

EYE OPENER..ABOUT TO BUY AN ENDOWMENT POLICY…PRESENTED NICELY BY AGENT OF LIC… BETTER TO GO FOR TERM PLAN+MF..
WE ALWAYS FEEL PUTTING MONEY FOR TERM PLAN AS “DEAD INVESTMENT”..AS NO RETURNS IF WE R ALIVE TILL THE TERM!
THANKS MANISH

sudhir
8 years ago

Hi sir,,my age is 27. I am planning to take lic new endowment plan (814) of 10 lacks for 27 years and my monthly salary is 50000. Please suggest me whether i should go for it, or should consider another plan or any changes to this……

sudhir
8 years ago

Then, which policy i should go ….pls suggest

sudhir
8 years ago

Yes Manish,,,i need help

ROHIT
8 years ago

Dear Mr. Manish,

Help needed urgent.

Sir, I also fell prey to Endowment plan described to me by Agent and at now I have paid half month’s premium. I have following options as of now:
1. Forget the half year premium paid and move to term plan cover+SIP,
2. Continue policy for next 3 year and surrender policy afterwards and recover the premium paid+bonus/interest accrued till date,
3. Continue policy for as long as possible or wait for maturity benefit at retirement age i.e. after 55,

pls advise asap, i m in big big confusion.

Reg
ROHIT

mayank
8 years ago

there are some endowments plan which are returning return of around 10 % .
Use calculations to arrive at the IRR value. if its greater than 10 % you should go for it. You wont get such return with such coverage

ROHIT
8 years ago

Thanks sir, could you pls advise/name some plans to consider.

ROHIT
8 years ago

Thanks Mr. Manish. Could you pls suggest best term+sip plans available i.e. which is best acc to you. I m confused which one to chose.

Following Plan from Max Life Insurance, i think they’r fooling or ………
Duration : 15 years
Life Cover :75 Lakh
Monthly Income :30,000 for 10 years

Rohit
8 years ago

Yeaah ! pls ….. it would be of great help.

tks
rohit

Raghu2528
8 years ago

Dear Manish,

I was missold two HDFC ClassicAssure Policy Plus of 7 years and 10 years premium paying terms. The HDFC agent had ‘assured” me that the policy would be converted into a One-Time Single premium payment, as I had mentioned that I cannot pay the premiums for such a long time. My total annual premium is Rs.100,000 and Rs 40000. I have paid the first year premium on both. As with others, the agent is not contactable now and the company is not willing to convert into a Single Premium.
What is my recourse – should I continue to pay till 3/4 years to get the surrender value ; or should I stop paying any more premiums.
Thanks

Raghunath

Tejaswy Ghanta
8 years ago

Hello there!
I’ve my aunt’s same policy and she has paid 12 premiums already.
Do you think it worth it to;
1. Make it a paid up policy and discontinue the premiums payable(if LIC has that option) OR
2. Surrender the policy(certain loss to borne and how shall we know to the actual amount?) and re-invest in a better product like PPF and other tax saving alternatives
Premium:Rs.6,887 YLY; Term:16 yrs; Dt:28/05/04; SA:Rs.105,000; Name:Endowment Assurance Policy(T No.14)

8 years ago

My son is 19 yrs. I want to take a policy for my son which has a long tenure, a less premiyn and a good maturity value with a life risk. plz suggest

Shailesh
8 years ago

Do not buy insurance from LIC if you are not Hindu.

LIC creates lot of problems while settling claims of Non-Hindus especially Muslims and Christians. They always ask for succession certificate (from lawyer) for claims from non Hindus which is costing nearly Rs.50,000/-.

Shailesh
8 years ago

No. For Hindus it is not required.

It is clearly stated by LIC office. One of my client is struggling for death claim of Rs.80,000/- since last 8 months.

Chandrashekar
8 years ago

Hi Manish,

I feel only investment for long term doesn’t make sense, one has to review his/her investment in regular basis, especially in case of Equity Funds as i feel non review of portfolio defeats the say ” Investment in equity is always profitable”

My suggestion to all investor is that do make systematic and for long term investment driven by some objective. Make sure you review it in regular basis.

8 years ago

Hiii Manish,

I am planning to start a Saving plan of Rs.3000/month for 15 years. I am 28 now. I am ready to take moderate risk. Please suggest how much should I put on term insurance and how much on other instruments. Which will be the best investment option for my requirement?? Please suggest

Sunil

usha
9 years ago

am planning to take a policy for my 2 kids aged 13 and 6 for their education. LIC policies are confusing and i need your guidance as how to give them an assured risk free return after 10 years. Can i opt for the new children money back policy

gowtham
9 years ago

Hi

I have been reading your articles from past 3 months and came to know that endowment policy should be avoided but I have a question regarding this

1) I have an LIC endowment Assurance policy “ Plan no – 14”. I have taken this policy 4 years ago(April/2011) and my age is 27 now.

Sum assured : Rs 6,00,000
Base Premium : Rs 38,000 yearly
Policy term : 15 yrs
Frequency: Annual.
Total maturity benefits : Sum Assured + Bonus + FAB If any
approx I would get 14,00,000 returns after total maturity.

As per this article, PPF is much better than endowment policy but in PPF if I would invest same amount for 15 years, I would only get 12,00,000.

Thanks.

mono