Samridhi Financial Solutions

Alternative to Endowment Plan… An Interesting Read

This traditional life insurance product, suitable for conservative investors, usually gives a return of around 6%. But is it the best bet for even the risk averse investors? Certainly not!

Here are two alternatives— one for the ultra-conservative and option two for a slightly aggressive investor—that can not only fetch better returns but gives a five-times higher insurance protection compared to an endowment plan. Worried about the tax incentives? Our alternatives will get you better deductions as well. But first, for a fair comparison, you must know how much you stand to get from the endowment plan.

Here is an illustration of an Endowment Policy (with profit option) to help understand the return it can generate.

Policy Details:

Age – 30 Years
Sum Assured (S.A.) – Rs. 5,00,000
Annual Premium – Rs. 23,565
Term of Policy – 20 Years
Premium Paying Terms – 20 Years

Maturity Amount
Rs. 9,20,000

Evaluating the Returns:
Historical Bonus over last 8 years – Rs. 42 per 1000/- Sum Assured.

Maturity Amount:
Sum Assured – Rs. 5,00,000
Accrued Bonus – Rs. 4,20,000/-
Total Maturity Proceed – Rs. 9,20,000/-
Amount Invested – Rs. 23,565 x 20 = Rs. 4,71,300/-
Return on this policy (IRR) – 6.01%

The Alternative Routes

What if you divert the same annual premium of Rs 23,567 towards a different investment plan? Here is how much you stand to gain.

ALTERNATIVE 1 : FOR CONSERVATIVE INVESTOR

An online term insurance for a 30 year old male with a sum assured of Rs. 25 lakhs and a term of 20 years will come at an annual premium of Rs 3,000. The balance amount of Rs. 20,565, if invested in PPF every year for a period of 20 years, will generate a maturity amount of Rs 10,79,438 earning annual interest rate of 8.5%. Meaning, an absolute gain of Rs. 1,59,438 over and above the maturity amount from the endowment policy and an incremental annualized return of 2.5%. What’s more? You now have taken a dedicated term-life cover which gives a five times more coverage, Rs 25 lakh versus the Rs 5 lakh in case of the endowment plan.

PPF Maturity Amount – Rs. 10,79,438/-
Absolute Gain – Rs. 159,438/-
Increased Sum Assured of Rs 25 Lakhs

ALTERNATIVE 2 – FOR MODERATELY AGGRESSIVE INVESTOR – COMBINATION OF ELSS & ONLINE TERM INSURANCE

Like in option one, buying an online term insurance with a sum assured of Rs 25 lakh will cost Rs 3,000. Assuming the balance Rs. 20,565 was invested in a good ELSS scheme, starting August 1999, via a systematic investment plan (SIP) of Rs 1,700 (units bought at the beginning of every month), at present, the value of the investment would be Rs. 21,75,957. This means an absolute gain which is Rs. 1,255,957 over and above the endowment maturity value, that too, when the term of investment is 5 years less. In the ELSS scheme we have invested for a period of 15 years compared to the 20 years in case of the endowment policy.

ELSS Maturity Amount – Rs. 21,75,957
Absolute Gain – Rs. 1,255,957
Increased Sum Assured of Rs 25 Lakhs
Please note the amount invested in much lower in this case.

Historical data suggests that there is a 100% probability of earning from stock markets if the investment time horizon is 15 years and above.

Make the best choice !!!!

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