Endowment Plans Worth taking?

Well as I explained in my previous article about the “Term Insurance”. I wish to talk about few more phrases which keep hearing and wonder what does these even mean?

The core plan is the same but companies have launched different versions with different names. You can find these plans in every life insurance company For Example, Endowment Plan.

Even customers have to check the meaning of this word using dictionary Companies decided to keep a name which can attract more customers. That's why they came with names like GUARANTEED MATURITY. Then Guaranteed Life-Long Income, Double Income, Money Back Plan, Sanchay Plus , or Assured Wealth Plan.

In which, everything is assured expect wealth, believe me seriously. India is facing two main problems:

First one , Agents get high commissions up to 25%, when they sell these plans. So, they have a good motivation to sell these plans but that doesn't mean those plans are good for you. If the Relationship Managers of banks fail to sell these plans and achieve their target. Then they are mistreated and they don't get incentives.

The second problem is the lack of awareness among customers. When someone uses words like Guaranteed income or double income. Then people are ready to invest their money without further research. Many people even feel proud after buying these products that he/she is responsible for family but you have actually done nothing for your family. If you have bought any such plan, You are not alone if you have any such plan. My father also has such plan, He has an endowment policy continued form 2009 I was not aware at that time as I wasn’t in India.

There was no such awareness on YouTube also as it is today. So, I can't blame my father but I can share some shocking truth of that policy with you. We have to face a loss of 1 lakh because we discontinued that policy. So, should I discontinue it with facing a 1 lakh loss or should I continue? So, my point is clear. I am 100% against these policies but I will explain all facts transparently. Then we will discuss something which will be very important for your future.

But first of all, Let's understand what is Endowment Plan, Money Back Plan Guaranteed Income, Double Income, etc.

These all plans are sold by an insurance company to you that's why you will definitely get a life insurance component in these plans. They have made a combo by adding Investment component Like Cold Coffee + Ice-cream. This is Insurance + Investment.

How this is different than ULIP? I wish to tell you in the previous article that your investment is market-linked. This means you will get returns based on the performance of that fund but here the amount you will get is pre-decided.

As its name says Guaranteed Income, Double Income. You know from day 1 that what you will get on maturity.

The agent will also add two other points here - No 1, this is Tax-free income No 2, this is guaranteed income but you will also get annual bonus declared by the company. That's why your amount will be greater than guaranteed income .

Let's clear all points one by one First of all, let's discuss Life Insurance Component. As I have told you last time, While taking a life insurance You have to ask one question to yourself. How much amount my family needs, if I die tomorrow? This amount should be a minimum 10 times of your annual income after tax. You must have a minimum of 1 crore life cover if you earn 10 lakh annually. It can be a maximum of up to 25 crore (25X). Depending on the premium you can afford but a person must have a minimum of 1 crore life cover, If he earns 10 lakh annually.

So that his family can maintain the same life style for the next 10 years, If he dies today. Family need not worry about school fees or other expenses.

Let me show you the life cover which you get in these endowment plans and the premium which you pay for these plans. HDFC Life Sanchay Plus Plan is here which is quite famous but this should be MINUS in the place of PLUS. Minimum premium is 30,000 but let me type 50,000. If I click on VIEW BENEFITS then this indicates that my sum assured is 6.5 lakh, if I pay 50,000 Rupees premium annually. This is not a life cover the company is doing, This favour for me.

What will we do with this great amount??

Point no 1, If I need a 1 crore life insurance cover then this is nowhere close to that amount.

Point no 2, this insurance is very expensive. If you are 25 years old and you need 1 crore insurance cover in TERM PLAN. Then you have to pay only 10-12,000 Rupees annual premium, This premium is 5X greater than that. There is a little modification.

They are saying that I will get 12.5 lakh if I die at the age of 44 And I will get 6.5 lakh if I die early. How can someone decide that when will he/she die? The reason behind increment in maturity cover with age is not that they are increasing your life cover. This is increasing because this is a combo plan which also includes investment. So, the amount which your family will get depends upon the age you die. This is my father's endowment plan of MAX LIFE. Its annual premium is 20 thousand rupees but its cover is only 2.14 lakh rupees. This is not a life cover but a favour which company is doing with us. If you are thinking that why life insurance is so expensive in these plans Its answer is – GREED.

As the IRDA Guidelines, companies have to pay a minimum 10X cover of annual premium. The company will give a cover of 2-3 lakh if the company is charging 20,000 premium but maximum cover in their hands. So, they will not give enough cover even after charging a high premium. The conclusion of the insurance component can be explained in only one word – Ewww or WHATTT?

Now, let's discuss the investment component of Endowment Plan. Let's take an example of Max Life Guaranteed Income Plan. As their illustration, If someone pays a premium of 1 lakh till 12 years, Then he will get 1.31 lakh from the 13th year. He will get 2.62 lakh from the 18th year (Double of Previous). In the last year(21nd Year), he will get a 2.62 lakh and 2 lakh rupees additionally. You invested 12 lakh rupees and you are getting a return of 21.70 Lakh till maturity.

Two points are noticeable here One - the amount is fixed here You already know that how much you will get in 13th year or 17th year and Second, your money will be doubled People love the feeling of doubling the money but you should think about the rate of return. You should know the rate by which your money is growing in any investment. You have to calculate Internal Rate Of Return (IRR). We have to use EXCEL to calculating IRR I have entered -1 Lakh for the years 1 to 12 because I am paying 1 lakh every year. I have entered +1.31 Lakh in my 13th year I have entered 2.62 Lakh. 18th year onwards In the last year (22nd year), I have entered 2.62 Lakh + 2 Lakh as mentioned in the plan Now, we will use a formula I will write = IRR and will enter the first cell and the last cell. The first cell is D2 and the last cell is D23. You will be surprised as you will enter this formula because you will know that your money will grow with a rate of only 5% in this plan. Even FD is better than this which has not any Lock-In. I will disclose the truth of surrender value, If you close this plan in the middle. This is a joke with the name INVESTMENT.

Let's see another plan HDFC Sanchay MINUS, There are 4 options in Sanchay MINUS Guaranteed Maturity, Guaranteed Income, Life-Long Income etc. You can check the IRR of these plans to know the truth. Let me calculate it for the Guaranteed Maturity. Plan You have to pay a 1 lakh annual premium for the first 10 years I have entered -1 Lakh for the first 10 years as I am paying this amount. I will get nothing from the year 11th to 19th. That's why I have entered 0 here I will get 22.72 Lakh rupees in the 20th year. So, I entered the same I again used the IRR Formula And this money is growing with an annual rate of only 6%.

Let us discuss Max Life Assured Wealth Plan. If you pay 1 lakh premium each year for the first 5 years, You will get 7.51 Lakh in the 10th year. This money is also growing with the rate of 6%. There are some plans in which your money grows with the rate of 4.4%, 4.8% BTW, this Max Life Plan is known as ASSURED WEALTH PLAN. They have transformed the meaning of the name wealth by stating a 7.5 lakh amount as wealth. As this logic, This is neither a good insurance plan nor a good investment plan some people may think that this investment is tax-free. We will get a deduction in 80C, Its returns are also tax-free. If your return is already very low and you also have to pay a tax on it. Then people will not buy this product.

Second, This investment is considered under the debt category. You get indexation benefit in debt investment, If you hold more than 3 years. I have explained in this article. You can read for more details, If your money has grown with such a pathetic rate that it even can't beat inflation. Then your payable tax will be zero after implementing indexation benefit. So, if your return doesn't beat inflation then anyway you will not pay the tax.

If it is about Section 80C, then read further to know about all benefits. Let's see surrender and lock-in in my father's policy. Its annual premium is 20,000 Rupees. We are paying it for the last 10 years, This means we have already paid the premium of 2 Lakh rupees. I will get only 85K Rupees, if I surrender it today. It means I have to face a loss of 1.15 Lakh. I have to bear the loss of half of my own money because I can't wait till maturity. Some people may attract towards bonuses of these policies.

Let me reveal the black truth of bonuses. Suppose you took a 20 years policy and suppose bonus was declared in 10th year but you can't get that bonus in your bank account on that day. That bonus will be in your policy and you will get it on maturity after 10 more years. So, if you even get a 5-10K Bonus than you can't touch it for the next 10 years. You may think that you will get a return on this money or this will be invested somewhere. Your 5K bonus declared in the 10th year will be same 5K in the 20th year when you will get it. The power of that money would have been decreased due to inflation. So, you are not creating wealth. You are destroying it on purpose. People even feel proud after investing in such policies and feel proud because they took a life cover for their family.

Second, they think that they are investing also. They feel responsible after securing their family's future in such a way. This thought is being planted in your mind by showing these emotional pictures and they are conveying a message that these people are happy because they took this policy. You are not doing right by buying these products. When free education is available on YouTube, Then you won't have anyone else to blame but yourself. If you realize in the future that you have done nothing for your family. Let me tell you the exact loss After 10 years of taking the policy, if you realize that we have done wrong. You are ready to invest 1 lakh rupees in such plans (Means 8.5K Per month).

Let's consider the monthly investment of 8,000 rupees Monthly Investment - 8,000 Rupees Rate of Return - 12% and it is expected with a good mutual fund. You can do it 11 or 10. If you disagree I am doing SIP for 10 years, You will invest around 9.5 Lakh in 10 years. You will get 18.5 lakh rupees Means you doubled your amount in 10 years. You get the same amount in these plans after 20-22 years. You are in an 18.5 Lakh loss if you are invested in these plans for only 10 years. Let me keep this 18.5 Lakh amount as it is I will not invest it further. I will keep it as it is, for the next 20 years and the amount will be near 1.80 Crore. Your total investment duration was 10 years and you invested only in first 10 years. You didn't invest for the rest of 20 years and still, your amount will be 1.80 Crore.

If you have invested in any endowment plan for 10 years and then you realize that you have done wrong then you can't create such a big amount now because you have less time now and you can't invest more too. ?As you have responsibilities as house expenses, the study of children, etc. You have lost crores, If you lost 10 years because TIME IS MONEY. I am discontinuing my father's policy because TIME IS MONEY. I am doing it even after I have to bear a loss of 1.15 LAKH. As I have already lost the opportunity of investing money for 10 years. Now, I don't want to lose it for further 10-15 years. That amount can grow rapidly, if I invest it in a good option. I still have my future's 10-15 years and I will not take any life or term insurance for my father after closing it. As I have already told you many times that Term insurance is useful for the people who have dependents but I am a single child of my parents and I am self-dependent. It means no one is dependent on my parents so they don't need a term insurance. I can invest the amount which I would have paid in term insurance. That's why I always advise you to think that what you actually need, If there is any dependent on you and you need a life insurance. Then you should go with term insurance which is the best insurance product. Secondly, you are becoming old with time If you want to take a term plan after 10 years then your premium will be high.

Question - What should you do, If you don't buy these plans?

The process is simple. Your priority should be family's security and your family should get enough money, If you die today. So, your priority should be, To take term insurance for yourself, because it is the cheapest life insurance in the world You can get. A 1-1.5 Crore cover by paying a Rs 10-15K annual premium. Then you need health insurance as diseases don't come with an invitation. Our lifestyle has changed a lot and hospitals bills are very expensive. So, we need financial help at that time. Then your priority should be to have an emergency fund. So, you can get a financial support, If you lose your job, You should have a separate fund which should have money equal to your 6 months’ salary. You just need to keep that money as FD or put it in a liquid fund. Then you should prefer diversified investing Always prefer diversified investing and don't hesitate to pay money to professionals. For it Invest your money in various options like stocks, mutual funds, Debt, NPS, etc but your some portion of the money should be invested in stocks. Some people disagreed in the last article that how can I expect a 12% return. This can be less or more than 12. You have a 0% chances of earning 20% return, If you don't invest. If you have done diversified investment then you don't need to worry if you get only a 7-8% return. As your entire money was not invested in that option. You have diversified your portfolio. That's why you should invest some money in stocks and mutual funds.

You can go with any trusted broker like Zerodha/Upstox in my opinion. In fact you have to pay 0% brokerage on equity delivery. You can open an account within 24 hours. The entire process is paperless and you should buy 1-2 shares after opening your account using your savings because you will learn better when you will invest yourself. Free knowledge is available on YouTube, So use that.

Officially article is completed and you can go now but I have to talk with you about a serious point and I would appreciate it, if you will read. An agent comes to you and most probably he is your close friend or a relative. He sells you such plan and you blindly trust on him. Ideally, you should trust as he is your close friend/relative but you should understand that it is his job and he will sell plans.This is not always true that he always wants to loot you.

The sad reality is that being an insurance agent in this country is very easy. There is a 1-hour exam and you can easily clear it. At the time of these fresher's training They get specific instructions that Don't sell term plan because the commission is very less. So, they lie that term plans are useless for customers that's why they teach them to sell Endowment, ULIP, Money-Back, etc because the commission is high in these plans. These words are not mine, This is the real-life experience of an insurance agent who commented about this and he left his job after 4 months. This means, If your relative comes to you as an agent to sell these plans, It doesn't mean that he wants to loot you but he doesn't know the reality of these plans as well. That's why he choose these plans also for himself and his family. I request you that don't trust blindly on anyone including me. You should verify all the information which I have told you today Learn to calculate returns, read about finance, research about it. Always ask good questions to the people on whom you trust. That's why I am always thankful to the people who comment their doubts and criticize. I also include their comments in the article as I don't want that this article should be one which people trust blindly, Don't trust blindly. Learn from here but do your own research.

Again, this article isn’t sponsored and it’s based on my own personal research.

HAPPY WEEKEND!