Losing Money via Endowment Plan


The Oxford Dictionary defines insurance as : An arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium.

The above definition, has, however, got quite altered, when we treat insurance, typically, life insurance, as a product. Take the example of the popular Endowment Life Insurance Plan.

Defining it in the simplest words, it is an amalgamation of life insurance and investment. This is usually marketed by Insurance Firms as a multitasking product or a wealth creator. When marketed in this way, these plans do fetch quite an audience and do attract a lot of “no fuss about investment” seeking investors.

But, like in every deal, there is a catch.


Even though endowment plans are known to be an amalgamation of insurance and investment, it might not be able to fulfil any of those in their complete sense. Well, most readers would claim here that no financial product designed to serve as a multipurpose can excel at both. Of course, sure. But majority of the financial experts have their say that subscribing to an endowment plan would not only make you pay high premiums but would also deplete you from your hard-earned financial assets.  In fact some of them are so-confident about endowment plans being bad, they call it a no-brainer decision to avoid endowment plan.

Let’s explore how that works, with this mathematical example:

Taking a policy mentioned on this link, we calculate the total amount of premium paid in an endowment plan and explore its viability:

A policy of Rs. 1,00,000 (guaranteed) for a term of 35 years with a premium of Rs. 2881. 

Being split into an investment and protection part makes an endowment plan reap two different types of returns too: (1) Guaranteed , & (2) Variable. Their names are evident enough to explain these terms.

In the case mentioned above, Rs. 2881 would reap Rs.  100835 in the term of 35 years, which is obviously more than the sum guaranteed for this endowment plan. But, then there is also a variable return part, which is given to the insured or his family.

This variable part is based on the return that the investment part of your premium has fetched, which, interestingly exists at mere 5-6% (averaged from links mentioned above, here, and here). t is to be kept in mind that these returns in endowment plan can come down to even 3-4% or can go high to 7-8%

Now, if you have a financial advisor helping with your investment and he gets you 5-6% return, would you be happy? Currently, even FD/RD interest rates are crawling at 7-7.3%, a simple no brainer-no risk option.

That is why and where an Endowment plan fails. If not good enough, then why in the market? Why it is being marketed and aggressively sold and bought? There are multiple answers to this question , such as, lump sum return, easy tax saving, less paperwork and less thought.

Related Posts