Investment Plans

Plans allow systematic enhancement of wealth with insurance

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Is Endowment Plan a Waste of Money?

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You could choose an endowment Policy for your insurance plans if you want both life insurance cover as well as Maturity amount as a lump sum. However, you would lose out on the returns part of the equation.

Life insurance is normally associated with Term insurance, and more recently, with amply promotions being splurged upon the other type of insurance plans, ULIP or the unit linked plans. The endowment plan, on the other hand, is sought after on account of the unique benefits that it offers, popularly cited as dual benefits provided by the insurance policy. However, is Endowment Plan worth the money that you invest in it? Are dual benefits better than one? Or, Is Endowment Plan a Waste of Money? Let’s endeavour to unearth some basic details about the insurance policy and see if it would be worth your while to go for it.

What is Endowment Policy?

The policy gained its popularity on account of some attractive notions attached with life insurance. Terms like regular and accumulated bonuses along with survival benefits are combined with a lump sum as maturity amount to form an attractive proposition. And that’s what an endowment policy is all about – these are insurance plans where you pay annual premiums that are allocated towards two aspects – your life insurance cover and an investment part that gives you annual bonuses. The bonuses are not paid immediately but get accumulated and are paid to the nominee upon the death of the policy holder or at maturity of the insurance policy. And to cap it all, you would also get a maturity amount on survival.

What’s the catch with Endowment Policy?

There are a few aspects, however, that need to be heeded to as you decide on going ahead with an endowment policy for your insurance plans.

High Annual Premium:

As you would expect with an insurance policy that gives a maturity amount as survival benefits, the annual Premium is quite high, when compared with a pure Term Insurance policy.

No Assured Bonuses Levels:

The bonuses may be regular every year alright, but there are no guaranteed Bonus percentages that you could expect with this kind of life insurance.

Returns below Par:

You would get your maturity amount as survival benefits, but the returns that you get from the investment would be less than what you could get out of a pure investment decision.

How could it be better?

Interests could be better:

This is the kind of life insurance that declares bonus every year and yet, the bonus gets accumulated only to be paid with the maturity amount. The pitfall is that this accumulating bonus does not draw interest, just accumulates. In essence, you would be foregoing your interest on your investment with these insurance plans.

Returns could be higher:

Typically, the investment portion of your life insurance tends to be invested in Government bonds, which may not give you sky high returns in any case. While the investment may be secure, you would not give it a stellar rating.

Investments could be smarter:

Imagine you could take out the investment part and focus on life insurance alone. If you could invest the money on your own, or if you could choose fund managers or mutual funds, or even invest in the Public Provident Fund, your rate of returns would be much more than what you could get out of your insurance policy that doubles up as life insurance and investment option.

Will I save on premiums?

If you chose to invest on your own and if you decided on term insurance as your preferred option in insurance plans, your premium would be much less than what you would have to pay with an endowment policy. The reason is that term insurance, unlike an endowment policy, does not give you any maturity amount and it is all about life insurance, and hence the lower premium.

So, what’s the verdict?

Insurance plans would be better off if they focused on providing life insurance cover. You could opt for endowment policy if you were okay with moderate returns and if your priority is life cover with the maturity amount in the form of a lump sum. In other cases, you may as well opt for term insurance for your insurance cover while you maximize your returns with the right investment decisions.