Published on Mon, Jan 30, 2012 at 16:18 |
Updated at Mon, Jan 30, 2012 at 18:42
Article from the Moneycontrol.com
Personalfn.com
Last week, we talked about term plans, saw their features in some detail and also went into the various riders available. This week, we're going to look at a more popular, but less beneficial product - the endowment plan.
There is a common misconception very prevalent in the market today that a term plan is useless, because if you survive the term, there is no 'benefit' by way of a lump sum pay out.
That's the way a term plan is designed. You survive - no payout, you don't survive - your family is protected. All protection, no savings.
The term plan ties in very well with the adage that your insurance and investments should be kept separate. Your investments to achieve your life goals should be completely separate from your protection needs .
Due to the perceived "drawback" of the term plan, that it does not provide anything to the policyholder in case he or she survives the term of the policy, the insurance companies came up with a new type of insurance product known as the Endowment policy and its sub-set - the Money Back Policy.
An Endowment policy is a combination of a protection plan and a saving plan. These types of policies cover the risk for the specified period. Premium of such policies are much higher as compared to premium in term plans.
Death Benefit
In case of your demise before the policy term, the sum assured and the accumulated bonuses are paid to your nominee.
Survival Benefit
In case you survive till the end of the term, you will receive the sum assured and the accumulated bonuses as declared by the company.
Advantage
� Endowment policies are useful for those who are looking to make some regular savings with 100% guarantee of their investment.
� If you require a lesser amount of sum assured compared to a term plan.
� If you want a lump sum amount at a desired age.
Disadvantage
� Endowment policy offers lower sum assured than offered in a term plan.
� The premium is much higher than term insurance policy for the same sum assured.
� Bonuses are not guaranteed. They are generally paid only when insurance company is making profits.
� If you wish to surrender this policy within first 3 years, you will not receive any surrender value.
� If you surrender this policy after the completion of 3 years then you will get less than the amount of premium paid during the 3 years.
� If you hold this policy for the whole policy term, then the yield you will get on this type of policy generally varies from 4 - 7.5% depending on term of the policy, which is a very low yield keeping in mind the long term of the policy.
Now let's look at the Money Back Policy.
Term plans offers only coverage and nothing is payable to the policyholder at the time of maturity. Endowment plans offers both coverage and savings, but the policyholder has to wait till the end of the term to get the benefit of this plan. Therefore a new type of plan was introduced by insurance companies known as Money Back Plan.
A Money Back Policy periodically provides survival benefits; it means that you will be paid back certain percentage of Sum Assured at a fixed interval. The payment frequency varies from policy to policy. These types of policies cover the risk for the specified period. Premium of such policies are much higher as compared to term plan and endowment plan.
Death Benefit
In case the policyholder dies before the policy term, then the sum assured and the accumulated bonuses are paid to the nominee without any deduction or adjustment for the amount that may have been paid earlier by way of survival benefit.
Survival Benefits
In case the policyholder survives then the following amounts are payable by the insurance company to the policyholder:
� After fixed interval - 15-20% of the Sum Assured (Depends on term of the policy)
� At Maturity - Sum Assured + Bonus - Survival Benefits already paid.
Example:
An individual aged 30 years buys a Money Back Plan from LIC. The Sum Assured is Rs. 6 lakhs for 20 years and the premium is Rs. 37,678. In case he dies during the term of the policy, then the nominee will get the full amount of Sum Assured and the accumulated bonuses as declared by the company, without any deduction for the amount that may have been paid earlier as a survival benefit.
In case he survives the policy term then he will get the following amounts:
Now that you know how the endowment policy and its sub set the money back policy work, you will see clearly that there is a stark difference between the 2 types of policies - the term plan vs. the endowment / moneyback policy. In our next article, we will see with the help of an example, exactly what this difference means to the policy holder.
Remember, if you have any queries on how to keep your insurance separate from your investments, your expert financial planner can professionally guide you through the process of planning your insurance and achieving your life goals.
(PersonalFN is a Mumbai-based personal finance website)
Article from the Moneycontrol.com