By Shashank Gupta & Kritika Gupta
Insurance companies come up with a variety of reasons in order to sell insurance products – some market it as a vehicle for investing money for retirement and others as securing the future of children. But is it as compelling as it sounds?
What is a Traditional/ Endowment Insurance Policy
Traditional/ endowment policies are those policies in which periodic premiums are paid by the insured person and a lump sum is received either on expiry of policy period or on the death of the insured (whichever is earlier). The premiums for such policies consist of the following two components:
- Premium towards risk cover, i.e. the sum assured in the event of the death of the policy holder; and
- Premium for investment purposes.
Insurance companies love endowment policies since they are able to invest the premiums collected to generate a return (much like banks). A portion of this income is returned to the policy holders at the time of maturity (after deducting their fees and expenses of course).
Returns from a Traditional/ Endowment Insurance Policy
These policies are bought mainly because the amount one is likely to receive at the time of maturity looks enormous in comparison to the premiums paid. However, most people do not calculate the actual annualized returns from these policies and are overwhelmed by the math involved.
In the table below, we have compared the returns of a typical endowment policy with other investment vehicles:
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