Endowment Policies – Bursting the bubble!


Much of the life is spent making money for one to enjoy and live comfortably. But owing to the human greed, we are never satisfied; always looking for opportunities to make our money grow. ‘Invest it in mutual funds, shares, stocks, bonds’, is often told to us by the guys in black suits with expensive laptops, a constantly ringing phone accompanied by a furrowed forehead expressing worry at all times of the day. But ever heard of ‘invest in an insurance policy’!!! Well if you have, I suggest you take your money and make a run for it.

Endowment policies, the most popular type of insurance plans promise you a hefty sum assured along with a bonus for a specific term plan while promising a return of your money at the time of maturity obviously ‘if nothing happens to the policy holder until then’ which is forfeited in the case of term plans and the customer is sent home empty handed. Sounds too good to be true! Well that is because it is. These plans are big in India. They take your, let me add, ‘very high premium amounts’, invest it, and provide to you as bonus and an amount at the end of maturity. The bonus rates are very less as they largely invest in government securities however it is seen as a return nonetheless. Customers see it as monetary returns to the amount of money they have spent on insurance. Blinded by this, it is momentarily forgotten that insurance is a risk cover and not an investment avenue and thus must be treated that way. In a way to earning any amount with the notion of ‘if nothing happens to me till maturity’, the real rates of return are over looked along with the amount of premiums paid.


Let us consider an example. For a sum assured of Rs 10,00,000 the likely premium for such a policy would be around Rs 49,000 per year. At the end of each year the bonus will be declared, the average of which cannot be more than 5%. This amounts to approx. Rs 50,000 per year. For a policy of 20 years, the customer will receive a total of Rs 20,00,000 (SA + bonus) at the time of maturity which is a rate of return of 6.50% p.a. approx. This is understandably a very low rate of return for such a hefty amount. However, if instead of the premium of Rs 49,000 the customer had gone for a pure risk cover or which is called term plan for the same amount of cover the annual premium will be a humble Rs 5000 approx. The remaining Rs 44,000 can be invested in various investments like PPF, Mutual funds or long term equity to earn a much higher return  as compared to the meager returns in endowment plans.


Most of the times we get caught in the words of our agents who are very prone to pushing these plans as the commission amounts are higher. However a simple calculation is what keeps you away from the real truth. Sugarcoated policies aren’t good merely because they sound so. Insurance is meant to protect ones family after the death of their earning member, not to earn a profit. Hence investments and insurance must always be kept apart. Let us not be greedy, let us choose wisely.

This article has been written by Shalmali Kulkarni.
Fpguru.com in its efforts to spread financial enlightenment organizes financial planning article-writing competitions in colleges. Shalmali was the joint winner in the competition held for the BBA program of NMIMS University ASM School of Commerce. We thank the Management & Dean of NMIMS  for their support.


0 #6 vijayendra 2011-05-16 09:43
everyone should read it. its is very well written and very important for people to know and understand the importance of the subject. good job shalmali.
0 #5 prat 2011-05-16 06:47
well written. makes an interesting read. i'm glad that the website is giving a chance to young students to hone their talents. keep up the good work!!!!
0 #4 Kashmira Laad 2011-05-12 06:36
Very well written, Shalmali
0 #3 Dhanashri 2011-05-12 05:27
Good article, well written.
0 #2 suhas kulkarni 2011-05-10 22:33
Good article, can be more elaborate
+3 #1 Kshitij 2011-05-10 06:46
A flowery but well written article, Shalmali.

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