Irdai issues investment returns guidelines: Here’s what they mean for policyholders

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September 02, 2016 6:00 AM

Buying an endowment policy leaves you with not just an insufficient cover, it gives you very poor returns as well. Your bonuses are at the discretion of the insurer and they have been constantly going down over the years

What is the first thing that comes to your mind when you think of a safe investment-cum-tax-saving instrument? Unfortunately, for most of us, we look at a life insurance cover as a safe bet for investment. And this is because our primary objective to buy a life insurance is not to get covered in the event of death but to save our hard-earned money from the hawk-eyed tax authorities.

You meet your insurance agents and they play on your emotions and greed of saving taxes as well getting returns and insurance, thus suggesting that the best plan to buy is an endowment plan that not only provides an insurance cover but also gives an assured return on the ‘investment’. What we, as consumers, don’t understand is that the market is flooded with several investment options that can give us higher returns.

There are a few things you need to know about endowment policies before signing the dotted line.

No transparency

When you buy an endowment policy, your insurer keeps aside a certain amount and invests the rest in the market. However, you must know that your insurer is under no obligation to reveal what portion of your premium is being invested and what is the rate of return earned on it. You may have been promised a 5% to 6% of return (the maximum which is offered on this product) and bonuses as well, however, what you are not told by the insurer are the charges in the plan. This is because the regulator does not make it mandatory for the insurer to reveal charges in an endowment plan.
Also, the regulator has not capped the commission an agent can earn, which results in insurance agents earning a huge commission i.e. up to 35%-40% of the first-year premium as commission. Besides, the surrender charges in an endowment plan are also very high. Each endowment plan typically has a unique surrender charges schedule. Based on the number of years the premium has been paid-up for, the policy holds a surrender value.

Low returns

In an endowment policy, an insurer invests your money in the debt market, thus getting lower returns. To better understand, we give you a simple example. If you are a 30-year-old and buy an endowment policy for up to 35 years at an annual premium of R3,00,000, the interest earned would be roughly around 3%-5% only. Now, if you buy a debt-linked ULIP with the same annual premium, you can earn an interest of about 7.5% to 9.5%, which gives you much higher returns over an endowment policy.
Now, if you buy an equity-linked ULIP, the rate of interest earned is as high as 14% or even more, thus the returns in such a plan after 35 years would be substantially higher. Thus, buying an endowment policy leaves you with not just an insufficient cover, it gives you very poor returns as well. If you are wondering about the bonus earned in an endowment policy, then sorry to disappoint you, but your bonuses are at the discretion of the insurer and they have been constantly going down over the years.
You should avoid getting trapped in the regular bait of assured returns, tax saving and bonuses while buying life insurance for the financial protection of your family.

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