Let’s understand endowment policy with an example:
If you are aged 35 and purchasing a 20 year endowment policy of 12 Lakhs, the annual premium will be around 60,000 per year. You have to pay 60,000 for the next 20 years and you will be getting the following at age 55.
1. Sum assured – 12 Lakhs
2. Bonus – 10.08 Lakhs
Total – 22.08 Lakhs
The Bonus is declared by the insurance company every year based on its profitability and claim experience. In the above calculation, I have assumed a bonus rate of Rs. 42 per thousand sum assured. This is based on the present bonus rate of a leading Life Insurance Company. Since it is a 12 Lakhs policy, the bonus for a year will be 50,400. (12, 00,000/1000 *42 = 50,400). If you are getting the same bonus for the next 20 years, you will get 50,400 x 20 = 10, 08,000 as bonus.
An endowment policy is a life insurance contract designed to pay a lump sum after a specific term (on its ‘maturity’) or on death. Typical maturities are ten, fifteen or twenty years up to a certain age limit. Some policies also pay out in the case of critical illness.
Let’s calculate the rate of return on this policy. It is around 5.5%. This is a dismal return for such a long-term investment. Even this is not guaranteed? Why?
Please note that the bonus is not guaranteed and it can change every year. Since the interest rates are coming down in India, there is a high likelihood of a reduction in bonus rates in the near future. Most of the companies are still maintaining the bonus rates, though interest rates have fallen significantly in the last few years.
Now, let us understand the benefits of this policy in case of death of the policy holder. His nominee will get the sum assured of 12 Lakhs and bonus accrued till date of death. Suppose the death happens at age 40, his nominee will get the following
1. Sum assured – 12 Lakhs
2. Bonus for 5 years – 2.52 Lakhs (50,400 x 5 = 2.52 Lakhs)
Total – 14.52 Lakhs
Will this 14 Lakhs be sufficient for the family in his absence? No.
This policy is not good as an investment due to poor returns and not good for risk cover due to the low insurance cover it offers.
Next: Exit from Savings linked life insurance policy/ Endowment policy, stay tuned
