Insurance: Two smart options beyond endowment

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Insurance has always been an instrument for future security, the need for which has been amply underscored during the pandemic. There are a few options nowadays – endowment policy, normal life insurance, whole life insurance, etc. Only endowment policies usually give you multiple benefits such as death benefit, regular income and also tax benefit under certain sections. But advisors often come up with two more options of mix and match of instruments that can offer better death coverage as well as better returns.

Benefits of endowment policy

An endowment policy is a combination of life insurance and investment, where a portion of your money is allocated towards mortality cover and the rest gets invested to give you capital appreciation. You have to pay regular premiums for periods such as 12 years, 15 years and 18 years.

In return, the person will get a life insurance cover along with other maturity benefits, like annual payments, regular annual bonus and others.

If we consider a standard endowment scenario of a person 32 years of age, then we will understand what benefits the person will get. Here we consider any standard policy of LIC or any other private insurer.

Suppose the person paid annual premium around Rs 50,000 and he/she has a death cover of around Rs 8 lakh. The person is paying this premium for 15 long years. Then from 16 years onward he/she will be paid in 3 or 4 instalments before the final settlement at 21 years.

The person will get around Rs 15 lakh in total. For this return he/she has to pay a premium of almost Rs 7.5 lakh (Rs 50,000 X 15 years).

If we break down the total amount, i.e. Rs 15 lakh, then we will find sum assured amount would be around Rs 8 lakh, yearly bonus incurred around Rs 6.5 lakh and final additional bonus of Rs 35,000.

Option 1

If you are a conservative investor, you may go with this option. You have to split your premium amount into two parts.

First, buy an online term policy, and invest the rest into your PPF account or in debt mutual fund. Almost all leading insurance player offers term insurance policies.

Suppose if you insured your life for Rs 1 crore, then you have to pay around Rs 15,000 yearly. Pay this amount for 25 years, and then the total premium would be around Rs 3.75 lakh.

With this amount, you would have a life cover of Rs 1 crore and that is for 25 years.

But for endowment policy you would have a death cover up to 20 years, if you opted for a plan for 21 years.

After the term insurance you would have another Rs 4.25 lakh in your hand. Pay this amount in any debt mutual fund or PPF which would give you a minimum return of 7.1%.

Simple arithmetic states if you invest Rs 35,000 (Rs 50,000 – Rs 15,000) in PPF every year for 25 years, it will give you around Rs 24 lakh. That is more than the return of endowment policy, i.e. Rs 15 lakh.

Option 2

For the moderately aggressive investor, a combination of equity-linked mutual fund plus an online term insurance is the best option.

In this case too, if you insure your life worth Rs 1 crore, then you have to pay a premium of around Rs 15,000 yearly.

Assuming the balance amount of Rs 35,000 is invested in a good equity-linked mutual fund scheme every year for the next 25 years, then it will you a hefty return of Rs 82 lakh, at the rate of 14%.

Advisor speak

“Endowment insurance is good, but if you are a bit smart and want maximum utilisation of your invested amount, then the first option is the best, go for term insurance and PPF. That is secure, safe and will give you a high return than endowment insurance policy,” said Nilotpal Banerjee, personal finance expert.

“Endowment plans are combinations of insurance and investment. You will get life cover and you get an investment component, so why not go with term insurance and PPF. That is the most secure option,” said Arvind Agarwal, income tax professional and CFA.

But the final call depends on the risk appetite of the individual, added Agarwal.