In the last newsletter dated November 11th 2014 you have learnt how an endowment life policy works.You will now learn whether an endowment life policy suits your life insurance needs or there is a better alternative.
It’s simple : Insurance + Savings
You pay a premium and insure your life for a sum of money (sum assured).You get bonuses until the time this policy matures. (maturity period)
On maturity you get : Sum assured + Bonus.
Endowment Life Policy
Table showing premium charged annually vs. Sum assured
You are 35 years and don’t know which life insurance policy to buy…Your life insurance agent suggests an endowment life policy. You take an endowment life policy paying an annual premium of INR 50,000 for a sum assured of INR 12.5 Lakhs. This policy matures after 25 years. You pay premiums till the policy matures.
Premium = INR 50,000
Sum assured =INR 12,50,000
Sir… this policy gives you a bonus every year till the maturity of the policy. You will get a bonus for 25 years.
You get a bonus of 5% of the sum assured:
= (5% of 12,50,000) = INR 62,500.
Your life insurance agent tells you :
You are paying a premium of INR 50,000 and getting a bonus of INR 62,500.Your life is insured free of cost.
What your life insurance agent doesn’t tell you :
The bonus is not paid to you each year but accumulates and is paid to you only on the maturity of the policy. (After 25 years).
There is no compounding of bonus.
The bonus of INR 62,500 accumulates each year and after 25 years it becomes INR 15,62,500 .
If you survive for 25 years of the policy you get the
Sum assured + bonus.
This is INR 12,50,000 + INR 15,62,500 = INR 28,12,500.
You have paid the premium of INR 50,000 per year for 25 years which comes to INR 12,50,000.
You get INR 28,12,500 from the endowment life policy after 25 years (On maturity)
Your returns from an endowment life policy are around 5.78%.
The Insurer pays a commission of 30% or more to the life insurance agent to sell endowment life policies. The commissions are paid out of the premiums you pay for the first year of the policy.
This means your life insurance agent would want to sell you the endowment life policy to fill his pockets.
Endowment plan vs term life plan
Table showing premium charged annually vs. Sum assured for a term insurance policy
You must never mix insurance and savings. Take a life insurance policy which will provide for your family in your absence. Take a term life insurance policy.
A term life insurance policy is a pure insurance policy with no survival benefits. You survive the term of the policy you get nothing.You need to take this policy across your working years till retirement.If you are 35 years and plan to retire at 60 years you take the term insurance policy for a period of 25 years.You need to take term life insurance for at least 10-15 times your annual salary/income.
You take a term life insurance policy and invest the savings in premium (difference in premium of endowment plan vs term life plan) in a good investment.
If you are risk averse you can invest this saving in a fixed deposit .A fixed deposit gives you a return of (8-9%) per year.This is definitely more than an endowment life policy which gives you a return of only 5-6% on your investment.
If you like taking risks you can invest this saving in premium in equity mutual funds. These give you higher returns but at a higher risk. The returns could be 10-12% over time.You could also suffer a heavy loss if the stock markets crash. This makes an investment in equity risky.
You take a term life insurance policy instead of an endowment life policy and save on your premiums.Term life insurance gives you higher insurance for lesser premium than an endowment life policy.You invest the difference in premium in either (fixed deposit or equity mutual funds) depending on your risk appetite. You get higher returns than an endowment life policy.
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