Here, we will discuss whether endowment policy will work for you
These are the most important things to keep in mind before buying endowment policy
Or endowment plans or life insurance endowment policy
Most people get to know about these things after they have bought endowment policies
They realise too late that this kind of life insurance policy is not right for them
This often means a lot of trouble for them
We discuss key features of endowment plans or endowment policies you must know before buying
People don't realise the implications of a combination of life insurance and investment
Which an endowment plan is
People also falter in knowing whether the life insurance coverage will be adequate
You need to ask is whether endowment policy can meet any financial goal
Most people focus on saving tax or check possible returns for premiums paid
People often overlook the utility of returns and how do they compare with alternatives
Endowment policy buyers are often oblivious of the costs of mistakenly buying it
People are often not able to see through sales pitches for endowment policies
Endowment policies are combinations of life insurance and investment
You can separate life insurance and investments with good results
Pure term plans without return of premium provide higher life insurance at lower premiums
There needs to be compelling logic of combining life insurance and investment
You need to understand the consequences of combining life insurance and investment
The "convenience" of combining life insurance and investment comes at a cost
In Unit Linked Insurance Plans (ULIPs) you get to know the costs
In endowment policies, you don't have the same disclosure of costs
Thus, by choosing an endowment policy you are choosing to buy a high-cost product with lower disclosures
In ULIPS, you take the call on where your money is invested i.e. which ULIP fund
In endowment plans, life insurance company is taking the investment decision
Of course, the risk is lower for an endowment policy but it comes at a cost
Proof of high charges of endowment policies lies in low surrender values in the early years
Check out the portion of the premium paid that you get back on surrender
After 3 years, you roughly get back a third of the premiums paid
The loss is due to the very formidable front-ended charges
It is argued that there is less uncertainty and risk in the endowment plan returns
Endowment policies have been delivering 4.5-5.5% tax-free returns
You get tax deduction for premium under Section 80C and tax-free maturity proceeds under Section 10(10)D
This return is inadequate in the backdrop of inflation of 7% p.a in the last 10 years
One argument to defend the return is that you also get life insurance coverage
You pay a much higher premium in endowment policy for the same life cover by a term plan
In endowment plans, chances are that returns and life insurance will be both inadequate
You get a range of bonuses in endowment policies depending on the plans
Bonus amount announced annually is not certain but they stay within a range
The price of less uncertainty is the lower returns in the form of bonuses
Public Provident Fund also provides tax-free returns and can be a competing investment
You can combine it with a term plan
You can get simple bonus, compound bonus, terminal bonus and cash bonus
These are there in with-profit policies where investment profits are shared
In without-profit, you get some kind of guaranteed addition in relation to life insurance amount
You get this in the end and in with-profit policy you can get an interim bonus
You get it in the year of death or maturity
Cash bonus can be announced where you don't wait till the end of the term to get it
Despite the bonuses, the returns remain low
Surrender conditions are difficult and you recover premiums only around 8-10 years
A lot of the marketing push for endowment policies are due to the high remuneration of distributors
They can get commissions of 35% upwards of first premium and 5% for subsequent years