Are Endowment Insurance Plans Worth Buying?

Insurance cover has never been a top priority for people but instead they think it as a combination of insurance and investment and hence most prefer endowment insurance plans which offer insurance cover along with investment component.

People prefer endowment insurance plans because they offer not only guaranteed returns but also tax benefits.

Insurance agents also continue to push endowment insurance plans because they continue to offer as high as 35-40% of the first year premium as commission. On an average agent gets 6-6.5% over the 20 years period. But high upfront commission of as high as 35-40% makes it lucrative for agents.

On the other hand, unit-linked insurance plans (ULIPs) have 6-8% of the first year premium as an upfront commission and 4-5% of the premium for the next four years. From the sixth year onwards, the commission is 2-3%.

A report submitted by Sumit Bose committee to recommend measures for curbing mis-selling and rationalizing distribution incentives in financial products came up with some observations on endowment plans. As traditional plans were left out of clean-up in the industry, they continue with a first year commission of up to 35%. And due to the incentive, insurance sales immediately moved towards traditional plans.

But important thing is to understand whether these endowment insurance plans are really worth buying for policyholders. Endowment plans have two basic problems neither they offer high life cover nor they provide good returns.

Take for instance, on the life cover front, usually; the sum assured is 10-20 times the annual premium in endowment plans i.e. for an annual premium of Rs 50,000 the sum assured is Rs 5 lakhs. On the other hand, in a term insurance plan, a healthy non-smoking male in 30-50 age group can get a life cover of Rs 1 crores for an annual premium of just Rs 12,000-15,000.

On the investment front, a 20-year regular traditional Investment Insurance Plan would barely double money over the full policy term. Even after adjusting for the tax benefit for a policyholder in the 30% tax bracket, one can’t expect more than 8.5% annual returns. For those in the lower tax bracket, the returns can be even lower at 6-7%.

Let’s compare these returns with Public Provident Fund (PPF). Assuming that a person investing Rs 1 lakh every year for 15 years, and kept the money in the account for 10 more years. Considering it continues to pay 8.7% interest over 25 years, the tax adjusted return would be between 9.3% and 10.75%.

Some endowment plans are being sold as guaranteed returned plans, and promise to offer 9-10% return every year from the end of premium paying term until the end of policy term. However, guaranteed addition is on the sum assured and not the fund value of the plan. The sum assured remain same throughout the policy term, but fund value keeps increasing.

According to the Sumit Bose committee, upfront commissions in such products skew seller behavior, and cause mis-selling and churn. It therefore recommends

Those upfront commissions should be phased out.

The committee has further recommended that key structural changes in the endowment plans are needed to keep pace with the changing financial requirements of individuals and investment landscape. It remains to be seen if the endowment plans would make way for better products that suit the policyholder’s requirements.

Souce: https://www.policymantra.com/blog/are-endowment-insurance-plans-worth-buying/