Know The Differences

When it comes to insurance products there’s a range of choices on offer. There are products like unit-linked insurance plans (ULIP) where the policyholder can choose to invest in different investment-related avenues and get market-linked returns. At the other end of the spectrum are plans that yield a fixed rate of return. Between the two extremes are two kinds of plans that have been popular with insurance seekers for a long time – ‘endowment’ and ‘money-back’ plans. While the terms endowment and money-back plans are used interchangeably, there are a few differences.

Plans that return money during the policy term are money-back policies. These plans, usually, give a fixed percentage of the sum assured periodically. In a 15-year policy and sum assured of Rs 10 lakh cover, these plans could give 8-12 per cent of the sum assured on completion of three years, 12-15 per cent after six years and so on. Endowment plans, on the other hand, pay the entire money on policy maturity. This includes products that offer the entire premium back and policies that have part-assured returns with bonus on policy maturity. Life Insurance Corporation (LIC) of India has around seven endowment products, depending on the sum assured. The public sector insurer also has six money-back plans varying according to the tenure and returns. All other insurance companies have at least one plan in each category. Many Indians prefer money-back policies even though they have higher premiums as they derive mental satisfaction from assured returns. Moreover, one can get a loan against these policies, which increases their appeal. In endowment plans, the sum assured for these plans is lower than money-back as the insurer needs to pay the entire amount on maturity. What the policyholder does not realise many a time is that companies give this money only after deducting all their charges. These include the agent’s commission, expenses incurred on policy administration and so on. Insurers collect the premium and invest it in securities. The investments are mostly made in debt instruments. Almost 85 per cent of the investment is made in debt instrument (50 per cent in Government of India securities) and the rest  is put in equities.