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Endowment assurance policies -- Rest assured, with caution

Sanjiv Shankaran

"Fill it. Shut it. Forget it." An old motorcycle advertisement.

THE LINE seems apt for an endowment assurance policy too. Savings-oriented endowment policies are most popular. In less complicated times, an annual premium had to be filled, and the rest was assured. Come maturity time, Life Insurance Corporation would give a tax-free return to the policyholder. In an environment with limited options, neither the policy features nor the returns raised eyebrows (or questions). "Fill, shut and forget" best described the way things were.

Times have changed, and now people are offered the same old endowment policy with a bewildering array of optional benefits. Returns on fixed income instruments have steadily dropped over the last couple of years. But not the cost of living, at least not in the urban areas.

Therefore, returns from a savings-oriented endowment policy are critical.

What are the features of a standard endowment policy? This requires a regular premium payment for a fixed term. If the policy-holder survives the term of the policy, he gets back the sum assured and investment returns (called bonus).

In case of an untimely demise, the nominees get the sum assured and the bonus accrued.

Who should buy an endowment policy? An endowment policy has a heavy savings tilt. Therefore, compared to a pure insurance policy, such as term policy, the endowment premium is far higher for the same risk cover. The higher premium is directed towards different investment avenues, and the returns handed out in the form of bonus. Therefore, an endowment policy should be considered only when the risk cover is secondary to investment returns.

A supermarket of riders: Following the privatisation of the insurance sector, there has been much emphasis on riders. Riders are optional benefits that can be added to an insurance policy at an extra cost. To illustrate, consider one of the more useful riders: Critical illness. This rider provides a pre-determined sum of money if the policy-holder contracts a critical illness mentioned in the policy document. Most policies cover major critical illnesses, such as cancer or heart attack, and the rider generally requires a small addition to the premium.

Policy-holders can also mix and match riders to suit their convenience. At one level, shopping for riders to cover specific needs seems no different from a visit to the supermarket. A number of almost similar products to choose from, but the differences are not so apparent. A closer look is needed to choose from the numerous similar products on offer. There are subtle, but significant, differences between the cover offered by various companies.

Consider the differences in the critical illness rider. When a company says a heart attack is covered under the plan, angina is not necessarily covered. The fineprint gives the actual extent of coverage.

A critical illness rider is, probably, the most intricate one offered by companies. Given the sizeable premium payment involved, and importance of the right kind of coverage, one must take time to study the fineprint.

Investment returns

These are key ingredients of an endowment policy. To start with, it is important to remember that investment avenues for an insurance company are regulated. Therefore, assuming no significant difference between the companies' money management skills, the returns too are likely to be similar. And low too. A lion's share of the investment goes into government securities, and other low-risk investments. Thus, the returns are moderate. The returns generated by insurance companies can be enhanced by the tax reliefs that vary according to one's salary.

One benchmark for returns could be the guarantees offered — not all companies offer a guarantee on returns. ICICI Prudential Life offers a 3.5 per cent guarantee on the sum assured for seven years. Subsequent returns depend on the company's performance, but there is a benchmark here — 3.5 per cent on the sum assured.

Another benchmark may be the returns that come in LIC's endowment policy (without profits). Here the policy-holder pays a regular premium and is guaranteed a sum assured higher than the aggregate premium. At present, this policy offers around 5 per cent.

These benchmarks represent the minimum one can expect. Assuming no dramatic change in the interest rate regime, policy-holders can hope for slightly higher returns than these benchmarks.

With the advent of private insurers, the endowment policy scene has become more attractive and crowded and, more important, confusing.

It may not be wise to go merely by the premium rates while opting for a policy, because in a savings-oriented policy, the lowest premium may not necessarily give the best return.

Endowment policies are one of the better investment avenues available, but a careful study is required before we get to the fill-and-forget stage.

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