In episode 7, I talked about two kinds of insurance you absolutely need. But now we’ve had a viewer asking us about a third kind of plan – an endowment plan. Though they are some of the most sold policies, endowment insurance is a poor fit for most people - especially youngsters. So don’t fall for the slick pitches and buy them. 

In this episode of Question of Money, we will talk about the different types of insurance policies, and explain why I won’t recommend endowment plans for young people.  Insurance is one financial product where sellers use truckloads of jargon. So much in fact, that it can be hard to understand what exactly you’ll get from a policy. Endowment plans are a classic example of this.  These are plans which try to bundle together an investment component along with a life cover.

So, if you are getting two products for the price of one, why don’t we like it?  There are three reasons. One, these are complex products which offer 3 or 4 benefits – a sum assured, death benefit, maturity benefit and guaranteed additions or bonus. Your endowment plan can be a participating plan, where returns depend on the profits of the insurer in future. Or it can be a non-participating plan where the insurer promises to pay you a fixed return. Wading through all this to understand the amount and timing of paybacks from the insurer can be very tough. But if you manage to do this, you will find that the final return from the plan isn’t great. It often works out to no more than 4-6% per annum, which you can get from a simple bank fixed deposit. 

Two, endowment plans are inflexible products where you commit to pay a fixed premium for 15-25 years. If you skip one year, your policy lapses and you need to revive it.  

Three, these plans do have a life insurance component. But the cover that you get, which is a multiple of the premium or the sum assured is too small to really help your dependents. The rigid terms and low returns make them a poor choice for anyone looking to create wealth or get a good life cover.  

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What are the other types of insurance plans?  

Moving on from endowment, what are the other types of insurance plans? There are ULIPs or Unit Linked Insurance Plans. These are just like mutual funds. They pool your money and invest it in stocks, bonds or government securities, declare a NAV and you can redeem your units at any time.  But unlike mutual funds, they have a 5 year lock in period, and an insurance component built in. ULIPs are not bad products per se, but I prefer mutual funds because they are more flexible and their performance can be evaluated more easily.  Insurers also offer pension plans, called annuity plans. In these plans, you pay a single or annual premium and the insurer guarantees you a regular pension for a long period, even for the rest of your life. These can be suitable for some sections of retirees and senior people. Young people have limited need for them. So, this leaves the simplest insurance plan - the pure term plan or pure life cover. This is a policy where you pay a regular premium and your dependents get a lumpsum in case of an unfortunate event where you are no longer around. Pure term plans allow you to buy a large sum assured like Rs 1 crore for modest premiums like Rs 20,000 or Rs 25,000, because the insurer doesn’t owe you anything as long as you remain hale and hearty. That’s the one we recommend for young people.  

Why not endowment plans  

But when it comes to pitching you insurance, most insurers or sellers don’t like to sell pure term covers. Instead, they like to sell you traditional or endowment plans.

(Host:Aarati Krishnan, Producer: Anjana PV, Camera: Bijoy Ghosh)

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