Endowment versus money back

Before buying, compare the premium with a term policy

Selecting insurance products can be confusing. There are products like unit-linked insurance plan (Ulip) where the policyholder can choose to invest in different securities and get market-related returns. Then, there are plans that promise to return a fixed sum.

However, there have been two kinds of plans that have been popular with every person seeking insurance – endowment and money back plans. And there is a confusion that exists on the difference between the two. Here’s a primer:

Plans that return money during the policy tenure 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 10 per cent of the sum assured on completion of three years, 15 per cent after six years and so on.

Endowment plans, on the other hand, pays the entire money only when the policy matures. This includes products that offer the entire premium back and policies that have part assured returns with bonus on policy maturity.

In insurance parlance, both of these products are part of an insurer’s traditional plans product portfolio. The oldest insurer, 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 on the tenure and returns. All other insurance companies have at least one plan in each category.
 

	Endowment	Term Plan	PPF
Sum Assured (Rs/lakh)	10	10	NIL
Term (yrs)	10	10	10
Annual Premium (Rs)	32195	2751	29444*
Returns at the end of 10 years (Rs)	321950	-	460666
*Difference between the Premium paid in endowment plan and term plan

“Endowment plans suits younger people who cannot spare much money for investments as they have other priorities. The sum assured for these plans are lower than money back as the insurer needs to pay the entire on maturity,” said an official with Bajaj Allianz Life Insurance Company. He added that these policies can be mortgaged, which increases their appeal.

Homemakers usually prefer money back policies even though it has higher premiums. Getting back an assured sum is a comforting factor.

What the insured does not realise is that companies give this money, only after deducting all their charges. These include the agent’s commission, 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 can be put in equities.

However, there are cheaper plans than endowment and money back policies – term insurance plans. If a person buys a term plan, and invests the rest of the amount in a public provident fund (PPF), he can make more money than what the insurance companies offer. PPF will also give them tax advantage.

Take an example of ICICI Prudential’s Life Guard policy. The policy has three options – a person can 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 is seeking Rs 10 lakh cover for 10 years, the regular premium for term plan is Rs 2,751. For the cash-back, the person would need to shell out 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.