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How not to fall into the trap of endowment insurance plan?
Endowment insurance plan is a type of investment insurance plan. Investment insurance plan as the name says is a kind that lets you invest a part of your premium in the funds of your choice that is, either debt and government funds or equity funds and the rest of the premium is allocated to provide you insurance.
When you buy a Best Endowment Policy, you choose to invest conservatively, that is why a part of your premium goes for buying debt funds and government securities, which has lesser or no risk at all. Due to the same reason, the return is fixed and limited to around 5 to 6%.
Endowment plan has limited benefits and therefore a very small number of people prefer to buy it. However, agents get successful in selling endowment products with equal ease. Knowing the trick they use will help you to save you from falling into the trap.
Let us understand this with the help of an example.
For instance, if an individual wants to buy a plan with sum insured of Rs 10,00,000 for a term of 25 years. The agent dangles the endowment plan that he has to pay Rs. 40,000 annually and he will be able to get Rs 50,000. How? He explains that if the insurance company declares the bonus of even 5%, it comes to Rs 50,000 annually, which is higher than Rs 40,000 and good enough to earn in any given year.
The marketing trick needs to be caught here. The insurance company does not declare bonus every year, neither is it paid immediately. Another point to be noted is- the bonus is not compounded. That implies, if you get Rs 50,000 as bonus in any year, say in the first year, it remains the same at the end of your policy term as well.
Also, because you get to invest, premium charged is on the higher side as compared to the term plan.
Endowment plan is not a bad product. You should definitely buy it however your expectations on ROI should be reasonable enough and it should not misguide you.
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