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
Yearly premium : 31,000
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.
Watch this detailed video in which the difference between Endowment policy and Term plan has been explained from basic concepts
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.