Pros And Cons Of Endowment & Money-Back Insurance Policies
Of all of life insurance policies on offer, the endowment and money-back policies are quite popular. The article compares both to find out the advantages and disadvantages of each
In our world full of uncertainties, insurance assures financial assistance to you and your family. Insurance is the most common method used to contain risk by transferring it. It shifts risk from an individual to a group. Insurance provides an important means of preventing risk from interfering with an individual’s achievement of financial objectives. Life insurance is universally acknowledged to be an instrument which eliminates risk, substituting certainty for uncertainty and comes to the timely aid of the family in the unfortunate event of death of the breadwinner. In simple words, life insurance is designed mainly to protect the beneficiary’s standard of living in the event of the untimely death of the wage earner.
Through life insurance, the beneficiaries will have the financial resources to protect their future income and pay for immediate and future financial obligations. There are various types of life insurance policies offered by insurance companies, namely, term insurance policy, endowment policy, money-back policy, whole life insurance policy, ULIP, child insurance policy, retirement insurance policy, etc. All of these have different characteristics and deliver different types of benefits to their policyholders. Out of all of these life insurance policies, endowment policy and money-back policy are quite popular.
So, let’s compare both to find out the advantages and disadvantages of each.
Endowment Life Insurance Policy
This is the most popular plan. The premium under the plan is paid for a fixed term. In case death takes place during the term, the sum assured along with accumulated bonus is paid to the nominee. If the policyholder survives the term of the policy, he gets the sum assured in addition to the bonuses accrued. The plan offers the advantage of making a provision for the family of the life assured in case of early death and also assures a lump sum amount at any desired age. The plan is available ‘with profit’ and ‘without profit’ option. The premium of the ‘with profit’ policy would be more than the premium of the ‘without profit’ policy.
Money-back policies are fixed-term policies. The premium is paid till the end of the term or till death of the policyholder whichever arises earlier. A part of the sum assured is returned to the policyholder once in four or five years according to the plan. This policy is ideal for investors who want guaranteed returns on their investment and regular payouts in addition to insurance. This money-back is paid during the plan of the tenure and is percentage of the sum assured which are known as survival benefits.
Nonetheless, if the insured dies during the maturity period of the policy, the survivor will get the full sum assured irrespective of the survival benefits already paid. With its low-risk feature, money-back policies are perfect for risk-averse individuals who are seeking investment as well as insurance coverage with income and maturity benefits. As can be seen from the above table, a money-back policy gives you returns at regular intervals throughout the policy term which can help you fulfil your short-term financial needs. On the other hand, an endowment plan helps you to save a wholesome amount that you can enjoy on maturity of the policy. The table shows that the XIRR policyholder is getting less than the current inflation rate, which is around 5 per cent. So, if an individual wants to fulfil his long-term and short-term financial goals he shouldn’t invest in these policies but should invest in mutual funds which deliver higher returns than inflation. You should purchase insurance with the aim of securing yourself against any uncertain eventualities and not as an investment option.
From the computation above it is clear that money-back policy is more beneficial as it provides regular cash flow of Rs 20,000 in the 5th, 10th and 15th year and Rs 1,18,000 as maturity benefit whereas the endowment policy maturity benefit is Rs 1,86,000.
Conclusion : To conclude, you should buy an insurance policy with the aim of securing yourself against any uncertain circumstances and not with the aim of investing as a policy delivers returns less than the inflation rate. You should assess your needs and go through policy details such as premium, sum assured, policy term, etc. before buying one. The data shown in the above table is only for illustration purposes derived from the sales brochure of a policy and is likely to change from time to time.