Simply put, endowment plans are life insurance plans, which not only cover the individual's life in case of an eventuality but also offer a maturity value at the end of the term. In the event of the individual's demise, his nominees receive the sum assured with accumulated profits/bonus on investments (till the time of his demise). In case the individual survives the tenure, he receives the sum assured and accumulated profits/bonus. An illustration will help in understanding this better.
Endowment plans: Safety with life insurance
| Age (Yrs) | Sum Assured (Rs) |
Annual Premium (Rs) |
Tenure (Yrs) |
Maturity Amount (Rs) (@ 6%) |
CAGR (%)* |
Maturity Amount (Rs) (@10%) |
CAGR (%)* |
| 30 | 1,000,000 | 27,600 | 30 | 1,920,000 | 4.98 | 3,181,400 | 7.69 |
Maturity benefits shown above are @ 6% and 10% as per Life Insurance Council guidelines.
Illustration based on an existing life insurance company's endowment plan
Let us take a 30-Yr individual who wants an endowment plan with a sum assured of 1,000,000 for a 30-year tenure. The premium he will have to pay for the same is approximately Rs 27,600. In case of an eventuality to the individual, his nominees will stand to receive the said sum assured (i.e. Rs 1,000,000). In addition, they will also receive the accumulated bonus if any. In case the individual survives the tenure, then he stands to benefit to the tune of the maturity amount (and bonus additions) as shown in the table.
As can be seen, the maturity figures are arrived at assuming a growth rate of 6 per cent and 10 per cent respectively. However, the growth rate is applied to the premium net of expenses, i.e. after deducting the expenses (on marketing, sales, administration) from the annual premium. The effective compounded annual growth rate on the yearly premium works out to approximately 4.98 per cent (for the 6.00 per cent figure i.e. Rs 1,920,000) and 7.69 per cent (for the 10 per cent figure i.e. Rs 3,181,400).
Having said that, in our view, it would be very difficult for the insurance company to provide a 10 per cent CAGR return on maturity. The reasons are not difficult to fathom. Conventional endowment plans traditionally invest a large portion of the corpus in debt instruments like Gsecs and bonds.
And in a scenario where the costs in the initial years on life insurance policies are high and debt instruments have not delivered 'exceptional' returns, it becomes difficult for the insurance company to deliver compounded annual returns even close to 10 per cent.
According to the Personalfn Research Team, the return on an endowment plan over a 30-Yr period is around the 6.00 per cent CAGR mark. Of course, this will vary across endowment plans and insurance companies depending on their expenses and investments. Taking all this into consideration, we expect endowment plans in general to give a return in the 5-7 per cent CAGR range.
Conventional endowment plans are also allowed to invest a small portion of their corpus in equities. However, most insurance companies usually shy away from investing in the stock markets. Individuals need to understand this while committing money in endowment plans. They also need to get a fix on whether their insurance company is exercising this mandate and if it is, then take a call accordingly in line with their risk profile.
However, to get a fix on the 'real' rate of returns you also need to adjust the returns for inflation. Even if we consider an average inflation rate of 5 per cent per annum over 30 years, the inflation-adjusted returns become far from impressive.
In our view, individuals should ideally look at separating their insurance and investment needs. One way of doing this is by buying a term plan and devote the remaining 'investible surplus' in other comparable avenues like mutual funds or even PPF/NSCs.
Unit linked insurance plans with their mandate of investing upto 100 per cent of their corpus in equities can also be considered. ULIPs also offer greater flexibility as compared to their traditional endowment counterparts.
Individuals should therefore be aware of the value proposition that endowment plans bring to their financial and insurance portfolio. They should form a part of the portfolio only after having given due weightage to the factors mentioned above.
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