Skip to main content

Returns from your Endowment Insurance Policy

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 insurance policies have always been very popular in India. The advent of ULIPs had an impact on the popularity of endowment policies, but they still continue to be quite popular. If you had bought your life insurance policy 10 or 15 years back, most probably it would have been an endowment policy. Endowment plans are hybrid life insurance and investment instruments. In the event of an untimely death, at any point of time during the term of the policy, the family of the policy holder gets the insurance cover, also known as sum assured. On maturity, the policy holder gets a guaranteed amount (also known as sum assured) and a bonus amount. In this article we will discuss, how endowment insurance policy holders can calculate the return on their investment. In the case of endowment plans, the investment made by the policy holder is the total premiums paid over the term of the policy. We will discuss how to estimate the maturity amount, with the example of endowment plans from Life Insurance Corporation (LIC). However, you can use this method to calculate returns from endowment plans of other insurance companies, with suitable adjustments.

How do endowment plans generate returns?

A portion of the premium gets allocated towards the sum assured and a portion of the premium is allocated towards the administrative expenses of the insurer. The balance portion of the premium gets invested. The money that is invested generates a certain return every year. This return may be declared as a bonus. The bonus is declared usually as a percentage of the sum assured. The life insurance company may declare bonus every year, but the bonus is not guaranteed. Once declared, this bonus becomes part of the guaranteed benefits of the plan. The bonus is not payable immediately, but accrues every year and becomes payable only at maturity or a death claim.

 

Types of bonuses

LIC offers three types of bonuses:-

  • 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.

 

  • 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.

 

  • 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.

Let us see now with an example, how to calculate the return of your endowment plan. Let us assume you bought an endowment plan in 2002 with a sum assured of Rs 10 lakhs and policy term of 20 years. Let us assume, you were then 30 years old and your premium would be around Rs 50,000 per annum. Further, let us assume you have opted for annual premium payment. Your policy will mature in 2022. Let us estimate what your maturity amount will be in 2022.

The table below shows the bonus declared by LIC since 2003.

The table below shows the Final Additional Bonus (FAB) declared by LIC by duration and sum assured in 2013

Normally policies which have regular bonuses do not have loyalty additions. Let us assume that, this policy does not have loyalty additions.

Let us now estimate what the final maturity amount will be. First we need to forecast, how much bonus LIC will declare on an annual basis, over the balance term of the policy. Over the years the bonus declared by LIC is coming down, as is evident in the table above showing bonuses from 2003 to 2013. In 2003 the bonus was Rs 61 per Rs 1000 of sum assured (SA). In 2013 it is only Rs 42 per Rs 1000 of SA. We will analyze 2 scenarios (you can analyze as multiple scenarios as you want based on your own assumptions).

Scenario 1: Bonus is flat at Rs 42 per Rs 1000 of SA for the balance term of the policy

For the balance term, 2014 to 2022, the bonus will be Rs 42 per Rs 1000 of SA every year. Let us assume the FAB will be Rs 70 per Rs 1000 of SA, as per 2013 rates (see FAB table above). Let us now estimate what the maturity amount will be. See the schedule below.

The maturity amount is Rs 19.59 lakhs. The total premium paid by you is Rs 10 lakhs. Since the investment is made on a periodic (annual) basis, we should use IRR to calculate the returns. The return of the endowment plan in this case is 6%.

 

 

Scenario 2: Bonus declines to 40 / 1000 SA from 2014 – 19 and 38 / 1000 SA for the balance term

From 2014 to 2019, let us assume bonus is Rs 40 per Rs 1000 of SA (5% lower than current rates) and Rs 38 per Rs 1000 of SA (10% lower than current rates) from 2020 – 22. FAB will be Rs 70 per Rs 1000 of SA, as per 2013 rates (see FAB table above). Let us now estimate what the maturity amount will be. See the schedule below.

The picture does not change all that much.

 

The maturity amount is Rs 19.35 lakhs and the return is 5.9%.

 

Investors should note that the maturity proceeds are tax free.

Conclusion

Investors, who rely on endowment policies for their retirement planning, will probably realize that the maturity proceeds will not be enough for their retirement and therefore can plan accordingly. It is important that investors clearly know what to expect from their endowment policies, so that they can go about their financial planning in a thoughtful way.

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

National Savings Certificate

National Savings Certificate Here's everything you need to know about the 5-year savings scheme offered by the Government This is a 5-year small savings scheme of the government. From 1 July 2016, a National Savings Certificate (NSC) can be held in the electronic mode too. Physical pre-printed NSC certificates have been discontinued and replaced with Public Provident Fund-like passbooks. What's on offer The minimum amount you can invest in them is Rs100 and there is no upper limit. Under this scheme, all deposits up to Rs1.5 lakh qualify for deduction under section 80C of the Income-tax Act, 1961. The interest earned is taxable. You can invest in multiples of Rs 100. These certificates can be owned individually, jointly and also on behalf of minors. The interest rates for all small savings schemes are released on a quarterly basis. The effective rate for NSC from 1 October to 31 December is 8%. The interest is calculated on an annual compounding basis and is given along w...
Read more

Am you Required to E-file Tax Return?

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   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...
Read more

Different types of Mutual Funds

You may not be comfortable investing in the stock market. It might not seem like your cup of tea. But you can start by investing in Mutual Funds. Many first-time investors invest in Mutual Funds. This is because they do not know how to invest in individual securities. Basic information on Mutual Funds People invest their money in stocks, bonds, and other securities through Mutual Funds. Each Fund has different schemes with specific objectives. Professional Fund Managers look after these schemes. Your Fund Manager could help you invest in a scheme that suits your financial goal. Functioning of Mutual Funds You could make money through Mutual Funds in different ways. A single Mutual Fund could hold many different stocks, bonds, and debentures. This minimizes the risk by spreading out your investment. You could earn dividends from stocks and interest from bonds. You could also earn capital by selling securities when their price increases. Usually, you could choose to sell your share any t...
Read more

Mutual Fund Review: HDFC Index Sensex Plus

  In terms of size, HDFC Index Sensex Plus may be one of the smallest offerings from the HDFC stable. But that has not dampened its show, which has beaten the Sensex by a mile in overall returns   HDFC Index Sensex Plus is a passively managed diversified equity scheme with Sensex as its benchmark index. The fund also invests a small proportion of its equity portfolio in non-Sensex scrips. The scheme cannot boast of an impressive size and is one of the smallest in the HDFC basket with assets under management (AUM) of less than 60 crore. PERFORMANCE: Being passively managed and portfolio aligned to that of the benchmark, the performance of the index fund is expected to follow that of the benchmark and in this respect, it has not disappointed investors. Since its launch in July 2002, the fund has outperformed Sensex in overall returns by good margins.    While every 1,000 invested in HDFC Index Sensex Plus in July 2002 is worth 6,130 now, a similar amount invested in Sensex then wo...
Read more

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...
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