Posted by: Arti Bhargava on Jun 19, 2017, 06.30 AM IST
Kavish is a young earner. An insurance agent has advised him to buy an endowment policy with a tenure of 30 years. The annual premium is Rs 30,000, for a sum assured of Rs 10 lakh (payable in case of death) and a maturity amount of Rs 22 lakh on survival.
There is zero risk involved. Kavish is told that it is a good place to start investing for his retirement. It is a policy that offers him the all important life insurance cover that he needs, as well as the benefit of long-term savings after a certain fixed period.
It is a blend of insurance and a savings scheme. Further, it comes with tax benefits at investment and withdrawal stages. Sounds like a win-win proposal?
Is the sum assured to cover for risk of death large enough to make any difference to his survivors? Is the sum assured or the maturity amount worth the premium he will be paying? Is the return worth the guarantee? If the answer to all these questions is no, then he must explore if there are other products that fulfill his needs of a retirement corpus and life cover.
Based on the details of the policy, the return that Kavish should be expecting over a 30-year period will be around 5.5%, which is comparable to post-tax fixed income returns. He might be better off with a term insurance and another investment product, depending upon his risk appetite and time horizon. He could split the amount he is willing to pay as premium for this policy over both these products. He would typically end up with similar, if not better, results.
If he is risk averse, he could consider fixed income investments. However, given his age and time horizon, equity could be a sound investment option, as the risk factor gets mitigated to a great extent. The high premium does not justify the low insurance cover and low returns. The policy is non-committal on the upside from bonuses.
Does Kavish really need such guarantees at such high cost with sub-optimal returns? This is not recommended unless Kavish has a very low risk appetite and is not looking to grow his investment into a decent retirement corpus. He will do better with a combination of a term insurance plan and a risk-appropriate investment product.