Endowment Policies – Features & Benefits
Endowment policies are the "Traditional" insurance plans sold by your uncle or neighbor agent. "You pay money for 20 years, you get a bonus + sum assured." Sounds good? Let's analyze.
How it Works
- Premium Split: You pay ₹50,000.
- ₹5,000 goes to Mortality (Life Cover).
- ₹45,000 goes to Investment (mostly Govt Bonds).
- Bonus: The insurer declares a "Bonus" every year (e.g., ₹40 per ₹1000 sum assured). This bonus accumulates and is paid at the end.
- Maturity: You get Sum Assured + Vested Bonus.
The "Return" Problem
Endowment plans offer Safety but very Low Returns.
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When are they useful?
Despite low returns, they have use cases:
- For Undisciplined Savers: If you are someone who spends every rupee in the bank, this policy forces you to save (forced discipline).
- Capital Guarantee: If you are terrified of stock markets and even banks, Sovereign-backed insurers (like LIC) offer high safety.
- Collateral: You can easily take a loan against these policies.
Term vs Endowment (The Cost of Mixing)
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Key Terms Explained
- Participating Policy: You participate in the profits of the insurer (Get Bonuses).
- Non-Participating: Benefits are guaranteed/fixed upfront (No Bonus).
- Surrender Value: If you stop paying after 3 years, you get a small portion back. If you stop before 2-3 years, you lose everything. This is a major trap.
Summary
- Endowment plans are popular but inefficient.
- Low Cover: They rarely provide sufficient life cover for a breadwinner.
- Low Return: 5-6% returns barely beat inflation.
- Illiquid: Locking money for 20 years with heavy exit penalties.
Quiz Time! 🎯
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Next Chapter: Unit Linked Insurance Plans (ULIPs)! 📈