Skip to main content

Endowment and Money Back Life Insurance Plans

Download Tax Saving Mutual Fund Application Forms

Invest In Tax Saving Mutual Funds Online

Buy Gold Mutual Funds

Leave a missed Call on

94 8300 8300

 

 

Endowment and Money Back Life Insurance Plans

 

Selecting the right life insurance product is often a tough task for insurance buyers because of the plethora of products offered by insurers, deliberate mis-selling of some products by certain insurance intermediaries and confusion about certain products. We have discussed in our previous insurance related articles that, term insurance is the purest form of insurance and should be the first choice for someone buying life insurance. Other insurance plans are hybrid insurance, savings and investment products. Endowment and Money Back plans are traditional insurance and savings products that have been very popular in India for a long time. While endowment and money back plans from Life Insurance Corporation of India (LIC) are most popular amongst insurance buyers, all other life insurers also have endowment and money back plans in their product mix. Although endowment and money back plans have been around for a long time, there is still confusion in the minds of a lot of insurance buyers about the returns and suitability of these plans. What is the basic difference between an endowment and money back plan? The key difference is in survival benefits. The endowment plans pays the money, which includes the sum assured (or cover) and bonus, on the maturity of the policy. Money back policy, on the other hand, returns money usually as a fixed percentage of the sum assured to the insured during the term of the policy at some regular frequency (e.g. 5 years). The balance sum assured and bonuses are paid on the maturity of the money back policy. In the event of a death claim, both endowment and money back plans pay the sum assured to the insured.

Both endowment and money back plans are essentially savings products, in addition to life insurance. Money back plans are suitable for those insurance buyers, who need income from their insurance plans at a regular frequency to meet specific financial objectives. In addition to life insurance, the objective of buyers of endowment plan is primarily savings. Some insurance buyers think that, the return from money back plan is higher compared to endowment plans, since they are getting a part of the money well before the maturity of the policy. We will address this notion by objectively analysing the returns from endowment and money back plans. For our analysis, we have chosen two new plans from LIC, the New Endowment Plan (# 814) and the New 20 year Money Back Plan (# 820). We have assumed that the insured is 30 years old and wants a sum assured of Rs 10 lakhs. The policy term is assumed to be 20 years. The table below shows the comparison of premiums of these two plans.

  • Survival Benefits of the New Endowment Plan: If the insured survives the maturity of the policy, he or she will get the sum insured and accrued bonus. We will discuss the different types of bonuses paid by LIC later in the article.

 

  • Survival Benefits of the New Money Back Plan: The insured will get 20% of sum assured as money back after every 5 years. Therefore in the above example, with a sum assured of Rs 10 lakhs, the insured will get Rs 2 lakhs after 5 years, Rs 2 lakhs after 10 years and Rs 2 lakhs after 15 years. On the maturity of the policy, the insured will get the balance 40% of the sum assured and the accrued bonus.

Types of bonuses

LIC offers three types of bonuses:-

  1. Simple Reversionary Bonus: Generally when we speak about bonus of an endowment policy, essentially we are speaking about Simple Reversionary Bonus. It is usually declared every year as an amount per thousand of sum assured and accrues throughout the term of the policy. It is payable either on maturity or claim or surrender of the policy. If the policy holder surrenders the policy before completing the full policy term, he/she will not get the full bonus amount. LIC discloses the bonus amount every year. It is available on the LIC website. The most important thing to note about Simple Reversionary Bonus is that it does not compound, it only accumulates.

 

  1. Final Additional Bonus (FAB): This bonus is paid on certain policies which run for long duration (e.g. 15 years and above, as decided by LIC). This bonus is calculated at the time of maturity or claim. The LIC bonus document contains the information regarding the insurance plans that qualify for FAB, and the FAB amounts by duration and sum assured.

 

  1. Loyalty Additions: This is loyalty bonus and is paid on certain policies policy holders who have been with LIC for a long time. This bonus is also calculated on per thousand sum assured basis. Usually Loyalty Additions are calculated at the end of the term.

Since the New Endowment Plan (812) and the New Money Back Plan (820) are new plans launched by LIC this year, the bonus rates of these plans are yet to be declared. For the purpose of our analysis, we assumed the bonus rates for the New Endowment Plan and the New Money Back Plan to be the same as the other endowment and money back plans of LIC. The 2013 bonus rate for the LIC endowment plans was Rs 42 per thousand of sum assured and that of the money back plans was Rs 39 per thousand of sum assured. Final additional bonus for endowment plans was Rs 70 per thousand of sum assured and that of money back plans was Rs 30 per thousand of sum assured. The table below shows the maturity amounts and the total payouts from the New Endowment and Money Back Plans.

In order to estimate the returns from these two plans we have to look at the cash flows for these two plans. Let us first look at the New Endowment Plan. The cash flow of this plan is straightforward. There are annual premium payments of Rs 47,617 every year during the policy term. On maturity of the policy, the insured gets the sum assured and the accrued bonuses, in total Rs 19,10,000. The table shows the cash flow from the endowment plan.

Let us now look at the New Money Back Plan. The cash flow consists of annual premium payments, money back and the maturity amount. The premium amount every year during the policy term is Rs 74,518. The insured gets Rs 200,000 money back during years 5, 10 and 15. On maturity the insured gets Rs 18,20,000. The table shows the cash flow from the money back plan.

You can see that, the return from the money back plan is lower than the return from the Endowment Plan. The reason for lower returns is as follows:-

  • The premium of the money back plan is much higher than the endowment plan

 

  • The bonus of the money back plan is lower than the bonus of the endowment plan

 

  • The money back during the policy term is used for regular consumption or some planned expenditures. It does not earn returns

Conclusion

We have seen that the returns of endowment plans are not high. The returns of money back plans are even lower. However, money back plans have specific financial planning objectives. The objective of money back plans is to generate income at some regular intervals to meet some planned expenditure. Investors should make an evaluation of their financial plan before investing in either endowment or money back plans. In the next article, we will discuss how we can improve our returns from money back plans by re-`investing the money received during the policy term.

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

Leave a missed Call on 94 8300 8300

Leave your comment with mail ID and we will answer them

OR

You can write back to us at

PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest Mutual Funds Online

Invest Any Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Any Fund Application Forms

---------------------------------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Franklin India Bluechip
      4. ICICI Prudential Top 100 Fund

B. Large and Midcap Funds Invest Online

      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
      4. Birla Sun Life Front Line Equity Fund
      5. Franklin India Prima

C. Mid and SmallCap Funds Invest Online

      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
      5. Birla Sun Life Dividend Yield Plus
      6. SBI Emerging Businesses Fund
      7. HDFC Mid-Cap Opportunities Fund
      8. ICICI Prudential Discovery Fund

D. Small and MicroCap Funds Invest Online

      1. DSP BlackRock MicroCap Fund

2.Franklin India Smaller Companies

E. Sector Funds Invest Online

      1. Reliance Banking Fund
      2. Reliance Banking Fund
      3. ICICI Prudential Banking and Financial Services Fund

F. Tax Saver Mutual Funds Invest Online

1. ICICI Prudential Tax Plan

2. HDFC Taxsaver

      1. DSP BlackRock Tax Saver Fund
      2. Reliance Tax Saver (ELSS) Fund

G. Gold Mutual Funds Invest Online

      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund
      4. Birla Sun Life Gold

H. International funds Invest Online

1. Birla Sun Life International Equity Plan A

2. DSP BlackRock US Flexible Equity

3. FT India Feeder Franklin US Opportunities

4. ICICI Prudential US Bluechip Equity

5. Motilal Oswal MOSt Shares NASDAQ-100 ETF

Popular posts from this blog

Mutual Fund Review: Taurus Tax Shield

    Taurus Tax Shield has seen a turnaround in performance since 2007, but still remains a volatile offering… The fund has seen a turnaround in its performance since 2007 and has delivered impressively during market rallies since then. The portfolio is also more diversified. It contained its downfall to an average level in 2008 but is still one of the most volatile offerings in this category. Bold investors can look at this fund.   Strategy The fund manager invests across the market capitalisation and sectors. The selection of stocks is made on the basis of long-term business prospects and value creation. Fund Insight Launched in March 1996, the fund was a laggard with just two annual outperformances. Concentrated stock bets and high exposure to mid and small caps led to it being hit harder during market downturns. The number of stocks in the portfolio never exceeded 20 and it was not rare to see the top 5 holdings account for around 60 per cent of the portfolio. After b...
Read more

NRIs and direct taxes code (DTC)

DTC Proposes To Do Away With Special Provision That Allows NRIs Liberalised Duration Of Stay In Country      THE new direct taxes code could bring a large number of global Indians under the tax net, as it does away with a provision that allowed individuals to escape tax in any country citing double tax avoidance.    The new legislation, introduced in Parliament on Monday, says an individual shall be a resident of India in any financial year if he is in the country for more than 59 days in that year, and has been has been India for more 365 days in four preceding financial years. A number of Indian industrialists including Vedanta's Anil Agarwal and Essar's Ravi Ruia have acquired non-resident status over the years.    The DTC has only attempted to clean up the provision in line with the laws globally. A phrase "being outside India" in the existing income tax law exempted individuals who stay outside the country for six months from paying taxes. This was prone ...
Read more

AXIS Long Term Equity Fund - The Best Tax Saver Fund for 2016

  AXIS Long Term Equity Fund - Invest Online   History:   The open ended mutual fund was launched on December 21 in the year 2009. It is benchmarked against BSE 200 and managed by the fund manager JINESH GOPANI. Initially the scheme was called as Axis tax saver fund but later it was renamed as Axis long term equity fund with effect from September 2, 2011. Nature of investment: As far as asset allocation is concerned, 97.52% of the stocks are equity and 0.02% is debt based. The primary focus of the fund is to invest in diversified equity stocks that have higher growth potential. Total asset size of the fund is in the tune of 4,996 CRORE as of June 30, 2015. Performance: The performance of the fund for one year, 3 years and 5 years are 23.6%, 29.9% and 19.1 respectively which are far greater than 6.4%, 14% and 5.6% benchmark figures. It has also preformed fairly well against SBI magnum Tax Gain (G) and HDFC tax saver (G). The growth comparison is enumerated below;                        ...
Read more

IDFC Classic Equity Fund

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   IDFC Classic Equity Fund IDFC Classic Equity is a large-cap equity fund which currently has assets under management worth Rs. 158.52 crore. It was launched in August 2005. The fund is benchmarked against the BSE-200 Index. Performance YTD 1-Year 3-Year 5-Year Since Inception IDFC Classic Equity 0.93 26.61 6.30 1.01 11.65 BSE 200 1.52 17.31 6.00 1.99 12.98 All figures in % as on January 31, 2013; Returns above one-year in CAGR terms ...
Read more

Stick to Good Fund Manager who Can Multiply Your Investment

A manager may be the difference between the best and worst funds. Here's how you can find the right one    Does a mutual fund manager make a difference to your investment? The answer may not be as easy as you think, since most best-performing mutual funds have moved away from individualistic fund management to process-driven methods, limiting the scope of an individual's role in investment decisions. In fact, many fund managers would speak at length about how the "system" their fund house has in place makes their task of picking stocks easy even though it restricts their freedom. Still, the question is important, especially after recent reports that the Securities and Exchange Board of India ( Sebi ) may ask fund managers to disclose to investors their track record of managing money. Let us take a look at the universe of large-cap funds over the past five years. According to Value Research, an independent mutual fund tracking firm, the topper in the category is DSP...
Read more
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