What is an Endowment Policy ? Why Endowment Policies should not be a part of your portfolio? Why insurance should not be mixed with investments? Let me explain by giving an example
Endowment Policies are a combination of Insurance and Investments. A lump sum amount is paid either on maturity or death.
If you are aged 30, you would be paying an annual premium of Rs. 31,368 for a 30 year Endowment Policy of Rs.10 Lakhs. There are 2 types of benefits, which you can get:
At the end of 30 years, you will get around Rs.24.4 Lakhs as maturity amount. It includes the Sum Insured + Bonus Accrued (bonus rate of Rs.48/- has been assumed for the entire term)
Let us calculate the CAGR in this policy. It works out to 5.9% for a 30 year investment product. Even PPF offers more than 8% returns on long term.
I have assumed bonus of Rs.48/- per annum per thousand sum assured, which is very difficult to continue for the next 30 years. Already bonus rates have come down from Rs.70/- levels to Rs.48/- levels. This shows that the value of Rs.24.4 Lakhs projected is on an optimistic note.
Your nominee will get Rs.10 Lakhs plus bonus till date, in case of death during this 30 year term. The policy offers risk cover also for Rs.10 Lakhs, which can be purchased by paying Rs. 850/- per annum through online term policies.
Endowment Policy – What if I surrender the policy after paying 3-4 annual premiums?
Surrender value in case of Endowment Policies is very low. You will only get 30% of the premiums paid minus first year premium and bonus accrued for previous years.
Now, let us see how by spending the same amount of Rs.31,368 annually, can you meet better results. Assume, that you are going for a Term Insurance of Rs.10 Lakhs (with a premium of Rs.850/-) and decided to invest the balance Rs.30,518 (Rs.31,368 -Rs.850=Rs.30,518) every year for 30 yrs.
1. For risk averse Investor
You can invest this amount in PPF. I have assumed an interest rate of 8% throughout, as against the current interest rate of 8.8%.Value of Investment of Rs.30,518 in PPF for 30 Years:Rs. 34.5 Lakhs.
PPF is a safe, 15 year investment scheme with the flexibility to pay any amount between Rs.500 – Rs.1 Lakh in a year. You can extend it in blocks of 5 years. This is going to be tax free even after Direct Tax Code.
In case of death anytime, your family will get Rs.10 Lakhs from the Term Insurance and the accumulation in PPF account. In both the cases, it is better than the Endowment Policy.
2. For an aggressive Investor
You can invest this amount of Rs.30,518 annually in a good performing mutual fund. The returns will be around 12%, as per the last 15 year history. The accumulated value of this mutual fund investment will be around Rs.73 Lakhs at the end of 30 Years.
In case of death anytime during these 30 years, your family will get Rs.10 Lakhs from Term Insurance and the accumulated value in mutual funds already invested. In both the cases, your family will get more.
So it is better to avoid Endowment Policies for investment purpose. Instead go for a Term Insurance and invest the balance in good investments for better returns.
Endowment Policies – Conclusion
Endowment Policies are not good from both perspectives-Insurance & Investment.
- High Premium
- Low Sum Assured
- Low Returns
- Low Surrender Value
It will be in your interest to go for Term Insurance and invest in good investments for better returns.
Be a good investor and not a good saver.
Avoid Endowment Policies-Say no to it.
Do not mix insurance with investments.