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| Know Whats In It For You - Endowment Life Insurance Policy |
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| The twin functions of insurance cover and investment have drawn many to an endowment policy. Like so much in life, there are no guarantees here |
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ENDOWMENT policies have been a popular product in India. These policies offer a combination of the functions of protection and savings/investment and prospective customers, dealing with an insurance agent for the first time, cannot seem to resist such an offer. Whether it is better to separate the protection and investment elements, or club them together with an endowment policy is a decision up to the individual investor. ET takes a closer look at these dual-function policies to see what these have to offer the investors. Traditionally, in an endowment policy, the policyholder
pays premiums towards a sum assured, over a specified term period. His returns are assured, in the form of either death benefits or survival/maturity benefits. In a unit-linked version of the policy, the premium that is paid (net of policy charges) is invested in various instruments like bonds, debentures, government securities, equity etc., thereby earning returns. The only catch with these policies is that all the returns are not assured. Of course, there is a certain guaranteed benefit which will be the payable in the case of the death of the policyholder.
But what the agents use to entice customers are the potential returns of the policy and these are not guaranteed. Your agent will be the first to tell you that you can eventually end up with even more than what they project using their allowed 6 or 10% examples. It is possible. A prudent investor must, however, consider and indeed lay emphasis on finding out what percentage of his premiums are actually being invested. Premiums will be reduced by charges like regular management charge, initial management charge, policy administration charge, agent commissions, etc., levied as a percentage of the total unit value, sum assured, premiums paid or as a monthly fee. It must be borne in mind that a 6% return calculated on 60% of your premium, would work out to less than a 4% return on 100% of your premium. Further, ask the agent to factor in a loss of a few per cent in the initial years, and once near the end of the term: and the ensuing result could be interesting.
Policies offered under this category of insurance are less diverse than other policies, as competition and popularity have ensured a high level of homogeneity. Take for instance, the entry age eligibility criterion. Across the board, anyone over 18 years of age can take up a policy, with four companies offering endowment even to toddlers (Bajaj, Sanmar, Birla, ICICI). Three companies maintain the minimum age at 12. It is seen that the maximum age for entry criterion, 55-65 years is the standard, with the exception of 70 (Metlife) on the higher side and 50 (Aviva) on the lower. The minimum term or the minimum duration for which the policy can be made out ranges from 5 to 10 years among companies, making endowments attractive for people who may have an upcoming lump sum requirement, like a childs marriage, for instance, and want to either save or insure themselves for it.
The range available on the maximum term also makes it useful for those thinking for a longer time plan, such as buying a house after retirement. The maximum term offered is generally 30 years, with an across the board maximum of 55(LIC). The maximum maturity age is 80, with the Birla offering. When it comes to amounts insured, companies offer endowment packages with minimum sums assured (SA) ranging from Rs 25,000 to Rs 100,000, although Rs 50,000 seems to be the norm. As with most other policies, most companies generally do not maintain any cap on the sum assured policies but among the four that do. Aviva has the lowest figure of Rs 5,00,000.
Annual premiums for insurance products see more uniformity in this category than any other. With an average (for a healthy male aged 35, term 20 years, and SA of Rs 5,00,000) of Rs 25,270, only one wide variation is seen at Rs 50,000 (Aviva). All the other companies fall below the average cost, the most economical being SBI at Rs 20,492. The reason why the Aviva policy is almost double the standard is because it is providing double the cover, in this case, Rs 10 lakh, on fulfillment of certain criteria. LIC is the second most expensive at Rs 24,632, Most schemes purport to have that little bit extra, justifying their premium rates.
However, insurance companies will not he pleased to have their products compared in this lowest common denominator fashion. They would rather showcase their products on a chart, showing you maturity values and guaranteed benefits, charting the potential of the fund in tune with its strengths. But then again, all assurances will be made only on the guaranteed values. Whether endowment polices suit the individual need or not, is a call the policyholder has to make, balancing the upside with the downside. A risky risk cover? Perhaps.
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