Friday, November 5, 2010

Endowment Plan in Life Insurance

Endowment plans were very popular in the past mainly because there were hardly any options available in the market. The popularity of such policies could also have been because of the guaranteed returns assured by the insurance providers. But with time this type of policy has lost its popularity with so many players in the market and new innovative products have taken over the insurance industry by surprise.

Endowment Plan is a type of Life Insurance policy where the premium paid is partly divided to secure your life and partly for investment purpose to generate revenues. The insurance companies in this reference act like brokers to you, they invest your money in the market and share the returns with you. Such types of plans are long term plans which cover life. You are bound to pay the premium until its maturity and the premiums payable for such plans are obviously expensive than other term plans. Since it is an endowment plan, in case you survive the tenure of the policy, an amount equivalent to the sum insured plus the accumulated bonuses is payable to you. If you expire during the tenure of the policy, the sum insured plus the accumulated bonuses is payable to the nominee or beneficiary. Special feature of the plan is that even on survival the policy holder is payable by the insurance company. This means that the plan is beneficial in both ways which is not the case in any other term policies.

In these types of plans the insurance companies use part of the premium paid by the policy holders for further investment. But it is surprising that the investments made by the insurance companies lack transparency and you have no control over the investment made by the companies. You have no idea where the money is being invested and how much and so on. We are aware that the insurance companies generally invest money in virtually risk-free government debt, which is a safe bet but earns meager returns. Each year the insurance companies declare bonuses and these bonuses are nothing but the profit earned on investments made after deducting the administrative expenses of the insurance companies. Here also there is lack of transparency because you as the policy holder have no idea about how much the company has earned out of the investments made and what are the administrative and other expenses of the investing company. So basically the policy holder has to accept whatever the insurance company offers to pay. The insurer has monopoly position over the policy holders here.
Thus this is one reason for the plan to have lost its popularity. The plan has a competition now, with private players in the market Unit Linked Plan has been introduced. It allows more flexibility and transparency.

The premium for Endowment Plan is significantly higher than any other type of Term life insurance plans for the same amount of sum assured because it is insurance plus investment plan clubbed together offering a wider option to the consumers. Therefore individuals should be aware of the value that endowment plans bring to their financial and insurance portfolio, then bend down to buy one.


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