Endowment, ULIP and other mixes to avoid

The most widely sold insurance in India is neither term nor health. It is the 'savings plan': endowment, money-back, guaranteed-income, child plan, ULIPULIPUnit-linked insurance plan: premiums are invested in market funds after charges, with a five-year lock-in and a small cover.. It usually arrives through a relative who became an agent, or the relationship manager at your bank, with the line 'you get your money back and cover too'. The trouble is that both halves are weak. The cover is too small to protect anyone, and the return is too low to grow anything. You pay for two things and get a little of each.

Why the mix fails

• The cover is thin. Most such plans insure you for about ten times the annual premium. A ₹50,000 premium buys roughly ₹5 lakh of cover, which replaces nobody's income for more than a few months.
• The return is low. Traditional plans typically earn 4 to 6 percent a year over their life, below PPF at 7.1% and often below inflation. 'Guaranteed' sounds safe, but the guarantee is on a small number.
• The costs are high. First-year commission on traditional plans can be a quarter or more of the premium, and ULIP charges are front-loaded, so your early money barely gets invested.
• The money is locked. Surrender in the early years returns a fraction of what you paid; many traditional plans pay nothing at all if you stop in the first year. Terms of 15 to 25 years are normal.

The common forms

• Endowment: pay for 15 to 25 years, receive a lump sum at the end. Low cover, low return.
• Money-back: the same, with small payouts every few years that are really your own money coming back.
• Guaranteed income or guaranteed return plans: a fixed payout for years after a paying period. The 'guarantee' usually works out to 5 to 6 percent.
• ULIP (unit-linked insurance plan): premiums go into market funds after charges, with a five-year lock-in. The investment part can do well, but a mutual fund does the same job with lower costs and no lock-in.
• Child plans: an endowment with the child's name on the brochure. A term plan on the parent plus a separate investment protects the child better.
• Loan protection or credit life: a single premium added to a home or vehicle loan. A term plan of your own usually covers the same loan at a lower cost and stays with you if you refinance.

If you already own one

Do not surrender in a panic. First get your term and health cover in place, so stopping the policy does not leave the family exposed. Then write down three numbers from the insurer: premiums paid so far, the surrender valueSurrender valueWhat the insurer pays if you close the policy early; usually far less than the premiums paid. today, and the paid-upPaid-upStopping premiums while keeping the policy alive at a reduced sum assured and maturity value. value. Paid-up means you stop paying, the policy continues with a reduced sum assured and maturity amount, and you lose nothing further. It is usually available once the policy has acquired a surrender value, which for most plans is after the first year or two of premiums. With those numbers you can decide:

1. Close to maturity, say three years left of fifteen: continue; most of the cost is behind you.
2. Middle of the term: make it paid-up, and redirect the premium to a term plan and your own investments.
3. Early, with decades to go: surrender may be right even with a loss, because the premiums still ahead of you matter more than the money already gone.
4. A ULIP past its five-year lock-in: check the charges; you can switch funds inside it or withdraw without surrender penalty.

Why do they keep getting sold? Commissions on bundled plans are many times those on term plans, and bank staff carry sales targets for them. None of this makes the seller a villain, but it means their advice is not neutral. Two protections help. Every policy comes with a free-look periodFree-look periodThe window after receiving a policy document, now 30 days, in which you can return the policy for a refund of premium less small charges., now 30 days from receiving the document, in which you can return it for a near-full refund. And no genuine offer expires at the end of the month; 'last day' pressure is itself the warning sign. Note also that maturity proceeds are tax-free under Section 10(10D) only when the annual premium is at most 10 percent of the sum assured, and larger policies bought recently can be taxable, which removes the last argument for buying them. The figures in the table above are illustrative and depend on the plan, but the pattern repeats across almost every bundled policy.