Term, Endowment, Money Back - Which Is the Best For You?

Recently, we wrote about the benefits of a term plan and also about the features and benefits of endowment and moneyback policies, as part of your insurance planning. As our next step, let's see a comparison of these 3 policies, to see which the best one is for you.

Below is the comparison between term plan, endowment plan and money back plan. The age of the individual is assumed as 30 years.

S. NO	COMPANY	PLAN TYPE	SUM ASSURED (Rs.)	TERM	PREMIUM	MATURITY AMOUNT	RETURN %
1	LIC	TERM	600,000	20	Rs. 1,936	0	0%
2	LIC	ENDOWMENT	600,000	20	Rs. 28,773	Rs. 12,84,000	7.14%
3	LIC	MONEYBACK	600,000	20	Rs. 37,678	Rs. 7,68,000	5.62%

 

 

 

 

 

 

Note: In case of Money Back Policy, you will get 1.2 Lakhs (20% of Sum Assured) every 5 years in addition to Maturity Amount.

You will notice a column in the above table - Return %.

This is not applicable to a term plan, because a term plan is a pure protection policy. At PersonalFN we advocate keeping your insurance separate from your investments. To achieve your life goals, you would need to build a strong portfolio of mutual funds, and to protect your family you need to insure yourself through life insurance and your family's health through health insurance. Thus, your investments will help you build wealth, while your insurance will protect your loved ones in case of any unforeseen eventuality.

Analysis

In the above table we have taken 3 different plans of LIC. The Sum Assured of Rs. 6 Lakhs and the term of 20 years are constant in all the 3 plans. We can clear see the huge difference between premiums of all them. The premium of Term Plan is the lowest while premium of Money Back Plan is the highest. In case of Term Plan there is no maturity value while in other 2 there is some amount of maturity value. On the basis of the premium that is being charged in each plan, the term of the plan and the amount of maturity value at the end of the term, we have calculated the returns on each of the plans.

Term Plan provides no return (0%) while Endowment and Money Back are providing 7.14% and 5.62% return respectively over a period of 20 years.

If you look at these plans on the basis of return you are getting, then you will feel that Endowment plan is the best, while Term Plan is the worst plan. But analyzing these plans on the basis of only return is not right; you should look at them on the basis of premium that you have to pay for them as well.

If you do an in-depth analysis then you will find that Term Plan is charging you premium only for protection purpose and not for investment purpose, while Endowment Plan and Money Back Plan is charging premium for both protection and investment purpose. The return provided by Endowment and Money Back Plan is very low, keeping in mind that you have taken the plan for 20 years.

Remember that the Endowment or Money Back Plans are not at all suited for protection purposes, which is the main objective behind taking insurance. This type of policy should be bought by only those individuals, who want a little bit of protection and 100% guarantee of their investment. If you really want to protect yourself against any unexpected contingency then buy a Pure Term Plan, which will come at a very low cost and if you want to invest something then look for other avenues which can give you better returns. Always remember, insurance is for protection and not for investment.

Now, suppose you already have these policies and need to decide whether to keep them, make them paid up, or surrender them.

Here are some guidelines which will help you understand what to do, depending on what type of plan you have.

Term plan:

There is no benefit in surrendering term plan as there is no maturity or surrender benefit is offered on these plans. If you feel that the existing term cover is not sufficient for you and you need more life cover as per your financial liabilities, then you should go for a new policy. You can do it with the same insurance company or with another insurance company as well.

Endowment:

Compare the charges involved and benefits receivable on the surrender of the policy.

Money Back:

Check your financial requirements and benefits offered by the policy. If payments under policy are in alignment with your financial goals then you should continue with your policy. Since it is a traditional plan, it will attract hefty charges on surrender and will erode even your amount invested in the plan.

Receipt of Benefit

• On Maturity

When the policy has completed its term you will get maturity benefits of the plan held by you.
Term Plan: No maturity benefits are paid
Endowment Plan: Sum assured plus bonuses
Money Back: Payments at regular interval and at the maturity last installment plus bonuses, if applicable

• On Death

If the policyholder dies during the term of the policy, then his nominee (family) will get claim amount on death.
Term Plan: Sum assured is paid to the nominee (family) and the policy will terminate.
Endowment Plan: Sum assured plus accumulated bonuses till date and the policy will terminate
Money Back: Sum assured plus bonuses without deducting earlier made payments during the term of the policy

Conclusion

Remember, a term plan is the purest form of insurance and is a straightforward protection policy. Endowments and money back policies will offer a return of between 4.50% to 7.50% per annum, when you include bonuses in the maturity amounts. Considering the term of these policies (20 years in most cases), this return is very low. Also, the sum assured amount in these policies is often too low to really protect your dependents in case of any unforeseen events. It is advisable to take a pure term policy for protection, and invest in recommended mutual funds to achieve your life goals.

PersonalFN is a Mumbai-based personal finance website.