Endowment policies have a reputation for becoming the regret point for many investors. And you might just be one of them. It at times happens that when you consider the return that you would be getting after a long period of investment you realise that it is not at par with the approximate return that you would be getting from other investments you have made. That generally happens because in an endowment policy there is no fixed return and the return is based on the bonus that is declared by the insurance company, and this, in turn, depends on the profit that is made by the insurance company.
Thus after a certain number of years, you might feel that investing in an Endowment Policy has been a mistake and you had not quite meant to engage your money for a long period of time in this manner. It could have been any friend, relative or an acquaintance who had sold this policy to you and you had invested without taking the long term requirements at heed. And now after investing in many other financial instruments, like a Mutual Fund or Equity Shares you might feel that the endowment policy is not yielding you the desired return and it being a long term plan you are not being able to stop it either. It is then when you feel the need to come out of this wrong investment that you have made.
Evaluate whether the Endowment Plan is actually bad for you
In order to decide whether the endowment policy that you have bought is actually a wrong investment, you should evaluate the plan as per your needs and the features that are provided by the plan. You should also keep in mind that your investment portfolio needs to have all types of investment catering to your various financial needs, like, investment, savings, life coverage, and thus should not be entrusted in one type of financial instrument only. Post considering all such situations you should judge whether you have actually made a mistake by taking an endowment policy.
Thus in order to do so, we need to go through the features and advantages of an endowment policy:
- It is a regular premium plan payable monthly, quarterly, half-yearly, or annually
- Gives life coverage to provide protection for the family in case of the demise of the insured person
- Cannot be redeemed in the middle of the term
- Provides tax benefits
- It’s a savings plan
- Lump-Sum amount that is exempted from tax is received at maturity
- Earns a bonus both annually at the end of the term (if declared by the insurance company)
Thus keeping these in mind the only place where you might feel that it is a wrong investment is when you compare the bonus that you earn from this policy and other investments that you have invested in like a Fixed Deposit or a market-linked plan like a Mutual Fund or a SIP. When coming to an FD it is not quite probable that the returns would beat inflation as no tax benefit would be available at its maturity and when you invest in a market-linked plan then the performance of the investment depends on the share market which is indeed volatile. Thus when you think of a plan that would give you both a stable return and would also bring in tax benefit then an endowment plan is a compatible choice, and it also contributes to creating a diversified portfolio for you.
The other reason where you might feel that it is a wrong investment is when there is a crunch of funds and you are not able to pay the premiums of the policy regularly. In such cases, you can avail for the loan facility which most endowment policies allow the policyholder to take.
There is one more problem that might push you to confusion as to whether you should continue with an endowment plan is the approach of its requirement. This plan can serve as a savings plan as it forces you to save and can be utilised for future goals, it can be used as an investment or as a mere tax savings instrument. But you might get confused in understanding its need in your financial portfolio.
Thus it is better to address these questions first before you come to a conclusion whether the endowment policy that you have taken is a wrong investment.
Assess the Profit and Loss as per your requirement before deciding
Endowment Plans have a reputation of not yielding the amount of return that worries an investor, but it is important to look at the plan individually and check whether the plan you have taken is catering to your financial needs. And in order to do that you need to check out on the features once again before deciding:
- Returns – It is best to check the past record of the bonus declared by the company in that specific plan that you have taken. It has been seen that though the bonus percentage seems quite less, the original amount that gets vested as the bonus is not negligible as the bonus is calculated on the Sum Assured and not on the Annualised Premium. Plus when the return is received it is completely tax-free so the inflation rate is generally taken care of by the investment. Thus please check the bonus that has been declared to your policy and the original amount that has been added to your sum assured. You can easily do the same by requesting a statement from the insurance company.
- Tax Benefit- As it is providing tax benefit it helps to fight the inflation rate better than any other non-linked financial products can.
- Flexibility – In case continuing the policy by paying regular premiums is a problem then you should try and find out if there are any loan options in your plan and look forward to the option available in the plan to pay your future premiums, rather than think of stopping the plan altogether and leaving it in a paid-up status or surrendering the same which would lead you to a heavy loss.
Find out ways of retaining it with the minimum possible loss by taking advice from your Financial Adviser
It is advisable to have a clear discussion with your financial adviser before deciding to do away with an endowment plan. He might provide you with solutions as per problems that are specific to you instead of looking at it from a general point of view like everyone.
Like if the problem with the plan is that you are not being able to continue paying the premium then your financial adviser might be able to guide you to the process of taking a premium holiday. That way you would get a break from the regular burden of paying a premium and also get some time to arrange funds for future premiums. The loan is a process which you can follow but when you take returns into consideration and profitability of the policy then a premium holiday is a better option but to avail the same you need the help of your advisor.
He can help you too to handle the returns by suggesting other plans that you can include in your portfolio to yield higher returns and need not worry about the average of the performance of your fund.
But it is indeed a problem if your financial adviser has left the industry altogether. Then in that case you would either have to decide on yourself or ask the insurance company to allocate an adviser to you who would from then on the guide you further to achieve your financial goals.
Let the Policy Lapse and be in Paid-up status or Surrender if required
If after considering all the above pros and cons you still feel that it is better to get rid of the Endowment Plan that you have then you can let it lapse. This can be done by not paying any further premium in the policy. Thus when you stop paying the premium the policy would get lapsed and would move to the paid-up status provided that you have paid all the premiums regularly till date. In the paid-up status at least the Sum Assured would be intact and your nominee would be entitled to get the same in case of your unfortunate demise.
But if you discontinue the policy within 5 years of inception then the policy is surrendered and in that case, the company would return to you the surrender value which is 30% of the premiums you have paid minus the first years premium. *You can also ask for the surrender value if you want to get the fund back even after you have paid regular premiums for more than 5 years*. But the amount that is received when surrendered is a complete loss to your investment and thus is no way advisable. Paid-up is a better option if the payment of premium is the problem.
Conclusion
Thus it is better to judge your financial means and also the financial goals you have before entering into an endowment Policy as once you start investing in one then the return point is almost closed except for the option of making a loss and getting out of the plan. Other financial instruments can always be used to balance up your return in case you feel that the return is not adequate. But letting the policy lapse and leaving it in a paid-up status, or surrendering the same would be the last option in your mind and should not be taken into account unless you have really scratched through other measures to protect it from becoming a bad investment and have failed.
