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Friday, August 26, 2016

10 Reasons why you should avoid Endowment Insurance Plans and chose Term Plan instead

10 Reasons why you should not by endowment insurance plans, slide show#

Endowment plans (Life insurance product) especially made popular by #LIC since mid 20th century, are very popular products in Indian households because of its high pitch campaigns and rampant mis-selling by insurance agents. Due to limited knowledge on the return calculation and conservative mindsets for investments, Indian population often fall for this wealth eroding instrument. Let us at look what these insurance cum investments/ savings plans actually offer.

These plans offer a sum assured on the maturity and added bonus componen accrued over the tenure. It cover death benefit upto sum assured and additional bonus component upto the premiums paid by the investor till the tie of death. Though it sounds very simple, I have found atleast 10 reasons, we should avoid this age old dominant insurance product.

1. The premium is exorbitant compared to the assured returns
For an insurance cover of 1 lakh, endowment plan would cost about five thousand; a term plan would approximately cover you for 50 lakhs in the same amount (considering the applicant is 30 years old)

2. It doesn’t adequately cover risks
Sum assured compared to the premium is very low. Hence, people end up buying a very low coverage sum assured compared to the actual requirement

3. The returns are not comparable to the rising inflation
Thumb rule of investment is projected return should beat the inflation numbers. If you rightly calculate the bonus payment in addition to the sum assured, on maturity, the return is no more than a 4% y-o-y appreciation of the total investment, while India is fighting inflation at 6-8% in last few years.
This investment is actually eroding the capital  

4. Very high cost of investment
For a 10 lakh cover, it costs about 50,000 a year, while a Term Insurance plan would do the same for just 1 thousand

5. The allocation charges, expense break-up are hidden
Endowment plans in India doesn’t disclose the break-up of agent commissions, asset allocation charges, expenses, allocation for sum assured, death benefits etc, while in other investment products like #ULIPs, #mutual funds, it is mandatory disclose actual break–up   

6. It is a complex product Insurance + Investment and fails in both area  
To attract the attention of conservative investors who strive for capital protection at any cost, the category mixes two benefits, making it a poor product for both the needs, neither it is capable of providing adequate cover, nor giving any opportunity of wealth creation  

7. The Bonus component is the biggest joke, offers simple interest, missing out on the Power of compounding
The ‘BONUS’ element in the endowment plans is the biggest miss-selling point used by the agents. The Insurance Company announces a yearly bonus, this is not given to you yearly, is added to your sum assured kitty. But, the bonus component varies every year, and it doesn’t get accumulated as compound interest, it stays the same, without earning a single penny interest on it. So, for example in an 20 years policy, if you earned Rs. 5,000 in the 5th years as a bonus, it will remain 5000 till the 20th year, without earning any interest on the amount.  

8. The agents/ brokers push and miss-sell because, they get a high commission on this
There has been enough media bashing over high charges on #ULIPs, which #IRDA promptly lowered and capped the expense charges making it a bit better product for the investors. But, endowment plans charge as high as 40% of the premium in the first year, there are also high recurring charges attached to it

9. There is a requirement of pure insurance, keeping it clutter free
#Life Insurance is an important element of over-all financial planning. It is meant to cover life risk of a earning member in the family. It must cover atleast 3 times the annual income of the member, which ensures a financial cushion during a time of trauma and despair. A term insurance product is perfect answer for this. It has low cost structure and offers only death benefit and sometimes critical illness/ permanent disability cover for an additional cost. The premium difference between endowment and term plan is as huge as 80% which can be invested efficiently.

10. There are much better options available for wealth creation in the long term
The sentiment behind endowment plan is mostly having an extra income/ pension post retirement. But the product fails to deliver on the area because of its complex nature and high cost structure. If you are conservative investor also, you may consider dividing the remaining amount in two parts, one for monthly/ quarterly/ yearly PPF contribution (enjoys triple tax exemption benefit and return of 8-8.5% annually). The remaining part can be invested in Systematic Invest Plan (SIP) in a hybrid fund/ balanced mutual funds(about 60% equity 40% debt), will earn you over 12-14% annually over long term. [Note: When a mutual Fund invests 60% of its AUM in equity, it is considered to be an equity mutual fund for taxation purpose, and the return earned on the same over 1 year is exempted from taxation]

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