Know The Differences

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When it comes to insurance products there’s a range of choices on offer. There are products like unit-linked insurance plans (ULIP) where the policyholder can choose to invest in different investment-related avenues and get market-linked returns. At the other end of the spectrum are plans that yield a fixed rate of return. Between the two extremes are two kinds of plans that have been popular with insurance seekers for a long time – ‘endowment’ and ‘money-back’ plans. While the terms endowment and money-back plans are used interchangeably, there are a few differences.

Plans that return money during the policy term are money-back policies. These plans, usually, give a fixed percentage of the sum assured periodically. In a 15-year policy and sum assured of Rs 10 lakh cover, these plans could give 8-12 per cent of the sum assured on completion of three years, 12-15 per cent after six years and so on. Endowment plans, on the other hand, pay the entire money on policy maturity. This includes products that offer the entire premium back and policies that have part-assured returns with bonus on policy maturity. Life Insurance Corporation (LIC) of India has around seven endowment products, depending on the sum assured. The public sector insurer also has six money-back plans varying according to the tenure and returns. All other insurance companies have at least one plan in each category. Many Indians prefer money-back policies even though they have higher premiums as they derive mental satisfaction from assured returns. Moreover, one can get a loan against these policies, which increases their appeal. In endowment plans, the sum assured for these plans is lower than money-back as the insurer needs to pay the entire amount on maturity. What the policyholder does not realise many a time is that companies give this money only after deducting all their charges. These include the agent’s commission, expenses incurred on policy administration and so on. Insurers collect the premium and invest it in securities. The investments are mostly made in debt instruments. Almost 85 per cent of the investment is made in debt instrument (50 per cent in Government of India securities) and the rest  is put in equities.[PAGE BREAK]

One mustn’t rush for a money-back or endowment policy blindly without considering the other more economical offers on the table. Term insurance plans are cheaper than endowment and money-back policies. Moreover, if a person buys a term plan, and invests the rest of the amount in a public provident fund (PPF), he/she can make more money than what the insurance companies offer.

Additionally, one can also avail of tax breaks by investing in PPF. For example, a policy from a leading private life insurance company that has three options – to take a term plan and pay one-time premium or pay regular premiums over the policy term or can even get the premium back when it matures. If a 30-year-old person is seeking Rs 10 lakh cover for ten years, the regular premium for term plan is Rs 2,751. For the cash-back, the person would need to pay Rs 32,195 a year. If this person buys a term plan and invests the differential amount (Rs 32,195 – Rs 2,751 = Rs 29,444) in a PPF, he will end up with more money than what the company offers

There are things insurance companies don’t tell you about endowment policy bonus such as:

• The money invested in endowment policies generates a certain return every year. This return may be declared as a bonus. So if an individual taking the policy has a policy of sum assured Rs 10 lakh and the company declares a bonus of Rs 50 per thousand of sum assured, then the bonus works out to be Rs 50,000.
• The bonus declared is not payable immediately. It accumulates and is payable only on maturity or in case the policyholder dies.
• The bonus declared does not compound, only accumulates: say, at the end of the first year the insurance company declares a bonus of Rs 50 per thousand of sum assured or 5 per cent of sum assured (policy of Rs 10 lakh). This amounts to Rs 50,000, that remains the same  for the next 19 years till the end of the policy. The same goes for the other bonuses declared for the period.
• Since the bonus declared does not compound, the returns are low.