Skip to main content

Is Your Endowment Insurance Policy Worth Your Money?

Up to a few months ago, ULIPs were being pushed in a big way. An insurance product that helped you also invest in the equity markets, in a single contract, was being touted as a dream product come true.

 

Research was done and efforts to educate the investor have since rubbished these claims of godliness. Stories of this high commission product that had not yet even proved itself, with unscrupulous agents hard-selling them to unaware customers who didn't even need these policies, made news time and time again.

 

Regulators stepped in, and ULIPs are now recovering from the bad press, quietly. Advisors are reluctant to really sell ULIPs, for fear that the client now knows that he will be getting a bad deal, and will not trust the advisor anymore. And lack of trust is one of the worst things that can happen to an advisor from his client.

 

So advisors are now selling traditional plans. Once again they are insisting that traditional plans are excellent, there is no market risk, the maturity value is assured, and everybody must have these policies.


But have insurance agents truly started working on your behalf instead of their own? Is a traditional plan really the best thing for you?
Let's have a look.

 

What is a traditional plan?

Term plans, endowment policies, money back policies, pension plans – these are called traditional plans.

 

A term plan gives you life cover, with no maturity or interim benefits. Premiums are the lowest for this type of policy, and for this low premium, your family will get the highest benefit. A Rs. 10 lakh term plan for a 35 year old with a 20 year policy tenure will cost around Rs. 5,000 per year. Only very few advisors are actively selling this type of plan.

 

As customer wants evolve, so do industry offerings.
Customers weren't always satisfied with the idea of no maturity benefit upon surviving the term of the policy, and so endowment plans were born.

 

An endowment plan offers you life cover, charges you higher premiums than a term plan, and gives you a maturity benefit. So if you survive the term, you will receive some amount of money as a maturity benefit, unlike in the case of a term plan. It also offers you bonuses along the way, paid out as an accumulated lump sum on maturity if you survive the term. over a 20 year tenure, your endowment plan, if you include bonuses, could yield you up to 8% per annum.

 

By itself, this return seems average, not poor. But, keep in mind this is over a horizon of 20 years.
In 20 years, considering inflation, your premiums will not be providing you much return at all. And a good diversified equity mutual fund will yield you double of this per year, beating inflation and giving you a return on your investment.

 

All said and done, an endowment plan yielding even as much as 8% per annum over a 20 year horizon (and not all endowments yield this, some yield 5% and 6%) is a waste of your money.

 

A money back policy is nothing but an endowment plan that's been dressed up a bit.
While an endowment plan will give you a maturity benefit on surviving the entire term, a money back policy pays out for every few years of survival. If for example you take a 20 year money back policy, you will get some proportion (say 25%) of your Sum Assured every few years, say every 5 years. You will also get your remaining Sum Assured plus accumulated bonuses, on surviving the entire term.

 

Yield on a money back policy sometimes comes to a little more than yield on an endowment policy, considering that once you get the interim pay outs, you can invest them on the spot.

 

But overall, endowment policies and money back policies are poor performers, especially considering the fact that the tenure is so very long (20 years, 25 years, 30 years).

 

So what do you do if you've already got one of these traditional policies? Should you drop it?

 

Often we come across clients who have a number of such policies, having been sold multiple identical policies with different tenures by their agents. They want to know if they should drop their insurance policies.

 

This depends entirely on 3 things:

 

a.                     What is the remaining policy tenure i.e. how many premiums are yet to be paid?

b.                    If the policy is surrendered today, what will be the surrender value?

c.                     What is the expected rate of return on the alternate investment option? i.e. if you are not paying premiums, where will you be investing the saved premium amount?

 

Consider the case of Mr. Shah again, who has an endowment policies with a 20 years tenure. Would it make sense to drop any one of these policies and invest the surrender value and remaining premiums into mutual funds?

 

See the table below:

Years

Endowment Premium

Surrender Value of Endowment

Term Premium

Premium saved & invested in Mutual Funds

Return from Mutual Funds @ 12%

Benefit / Disadvantage *

0

24,632

-

2,059

22,573

1,821,613

751,613

1

24,632

-

2,059

22,573

1,603,867

533,867

2

24,632

24,893

2,059

22,573

1,600,877

530,877

3

24,632

51,354

2,059

22,573

1,588,464

518,464

4

24,632

69,138

2,059

22,573

1,504,721

434,721

5

24,632

89,341

2,059

22,573

1,431,511

361,511

6

24,632

112,249

2,059

22,573

1,367,515

297,515

7

24,632

138,147

2,059

22,573

1,311,429

241,429

8

24,632

167,422

2,059

22,573

1,262,400

192,400

9

24,632

200,422

2,059

22,573

1,219,362

149,362

10

24,632

237,516

2,059

22,573

1,181,352

111,352

11

24,632

274,896

2,059

22,573

1,135,863

65,863

12

24,632

316,940

2,059

22,573

1,095,690

25,690

13

24,632

364,504

2,059

22,573

1,060,870

(9,130)

14

24,632

418,623

2,059

22,573

1,031,454

(38,546)

15

24,632

480,461

2,059

22,573

1,007,348

(62,652)

16

24,632

555,533

2,059

22,573

994,972

(75,028)

17

24,632

640,292

2,059

22,573

984,875

(85,125)

18

24,632

735,995

2,059

22,573

976,829

(93,171)

19

24,632

844,008

2,059

22,573

970,571

(99,429)

20

Maturity Value incl. Bonus (Rs.)

1,070,000

 

 

 

 

* (Return from MF minus Endowment policy Maturity Value)

 

The premium paid for the endowment policy is Rs. 24,632 per year. The premium paid for an equal sum assured (Rs. 5 lakhs) term plan is Rs. 2,059. The difference is Rs. 22,573 of additional premium every year.

 

The table above examines whether it makes sense for Mr. Shah to drop the policy and invest the surrender value received and the remaining premiums (that he would have paid) into mutual funds, assuming a return of 12% per year from the mutual fund.

 

Consider Year 7, the year of his 8th premium (as the count starts at Year 0).
If he surrenders the policy in this year, he will receive Rs. 138,147 as the surrender value. He can invest this surrender value and also invest the remaining premium amounts (Rs. 22,573 per year for the remaining years) into mutual funds, and the money he invests would grow to Rs. 13,11,429 by the end of the 20 year period. This is a surplus of Rs. 2,41,429 over Rs. 1,070,000 what the endowment policy would have paid him.

 

Now consider Year 17 i.e. the year of his 18th premium.
If he surrenders today, he will receive a surrender value of Rs. 6,40,292. He can invest this corpus and the remaining premiums into mutual funds, and the corpus accumulated within the next 3 years would be Rs. 9,84,875. This is less than he would receive is he simply continued with the endowment policy. The benefit of continuing the policy is Rs. 85,125.

 

In this particular case, the break-even year was Year 12. If he surrendered anytime up to and including Year 12, it would make financial sense for him to drop the policy and invest the surrender value and remaining premiums into mutual funds.
Anytime after Year 12, it would be more financially prudent to keep the policy.

 

Your Action Plan

Now you know exactly what a traditional policy is all about. If you have these policies, then depending on how long you have had it, what the surrender value would be, and what rate of return you would get on your alternate investment, you can decide whether you would like to keep the policy or not.

 

Else, you can always speak to your financial planner,who will create a customized insurance plan for you. And remember – with a straightforward term plan, you don't have to worry about whether your money is being effectively utilized. A term plan really is the best life insurance a person could have.

 

Popular posts from this blog

ICICI Pru Mutual Fund Dividend

ICICI Prudential Mutual Fund has announced dividend under the following schemes: Scheme Dividend ( Rs /unit) ICICI Pru Capital Protection Oriented Ser V Plan B-D 0.03611325 ICICI Pru Capital Protection Oriented Ser V Plan B Direct-D 0.03611325 ICICI Pru Balanced Advantage Direct-DM 0.06 The record date has been fixed as February 08, 2017. ------------------------------ ------ Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds Top 4 Tax Saver Mutual Funds for 2017 - 2018 Best 4 ELSS Mutual Funds to invest in India for 2017 1. DSP BlackRock Tax Saver Fund 2. Invesco India Tax Plan 3. Tata India Tax Savings Fund 4. BNP Paribas Long Term Equity Fund Invest in Best Performing 2017 Tax Saver Mutual Funds Online Invest Best Tax Saver Mutual Funds Online Download Top Tax Saver Mutual Funds  Application Forms For further information contact  SaveTaxGetRich on 94 8300 8300 ------------------------------ ------ Leave y...

Hidden Bank Fees

  What Banks Hide From Customers Imagine after a peaceful and exciting holiday you receive your bank statement with steep charges. You then rush to your bank and start confronting staff members and to your dismay, you come to know that the high end debit card was charged very heavily. Wouldn't this cause damage to your finances? So remember, the world outside is full of deceptive and double cheating people. Unethical practices are always used by company sales person in order to meet the target. Credit card companies, mutual funds and bank institutions always play dirty tricks to lure customers and the practices are rampant. So here's how you should be careful while dealing with your banks: High End Debit Card Charges While opening an account with a bank you opt for a debit card with minimal charges. But later on when you upgrade your card and opt for high end debit card the annual charge rise by a good amount. Though such a card has slew of features but it all comes at a high ...

Partial withdrawal from PPF

  Public Provident Fund (PPF) account has a lock in period   If you opened a PPF account to meet your retirement needs,, think twice about withdrawing from this fund before retirement. But provided it's an emergency here are the rules. Public Provident Fund (PPF) account has a lock in period before which you cannot withdraw your money.   The partial withdrawal is allowed after the completion of 6 financial years . This means that you will be allowed a partial withdrawal from 1 April 2017. The maximum partial withdrawal allowed is the least of the following: 50 percent of the account balance at the end of fourth financial year, 31 March 15 50 percent of the account balance of the end of previous financial year, 31 March 17.   There's a loan option available on your PPF account between the fourth and the sixth financial year. You can obtain a loan of up to 25 per cent of the balance in your account. However, this will attract interest of 2 percent more than the prevailing ...

Updating a minor PAN card upon becoming adults

  Updating a minor's PAN card once they become adults A PAN card issued in the name of a minor does not contain the minor's photograph or signature, and therefore, cannot be used as a valid proof of identity. Once a minor PAN card holder turns 18, the relevant changes must be made in the PAN records. A new card is then issued bearing a photograph and signature. Application The applicant is required to fill up the "Request for new PAN card andor changes or correction in PAN data" form. The form can be filled up online by accessing NSDL's Tax Information Network website and clicking on the online PAN application tab. Information The applicant must mention the existing PAN number in the application and check the `photo mismatch' and `signature mismatch' boxes, and submit the online form. The form must also be printed out, signed by the applicant, and submitted along with two photographs. Documents Identity and address proof in the form of a copy of the app...

Perpetual SIP - Its Advantages

Retail investors have taken a fancy to investing in mutual funds through systematic investment plans (SIPs). As per industry estimates, Rs 4,000 crore flows into SIPs every month. One way to take advantage of SIPs in a true long-term manner is to opt for a perpetual SIP 1. What is a perpetual SIP? In an SIP , you make periodic investments in a mutual fund scheme of your choice generally every month for a pre defined tenure. While signing up an SIP mandate , you have the option to leave the end-date column blank. If the column is blank, it means the investor has opted for a perpetual SIP . Most fund houses assume this SIP will continue till December 2099 unless you give a written communication to stop it. However, some fund houses require you to tick the `perpetual option'. 2. What are the advantages of perpetual SIPs? Registering an SIP involves a lot of paperwork and it takes time. It is observed that many investors skip their SIP instalments when they go for short-tenure option...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now