INSURANCE
Is an endowment or money-back policy a good investment?
It is the most widely held financial product in Indian households and one of the most poorly understood. The returns are knowable, and most policyholders have never calculated them.
THE SHORT ANSWER
Endowment and money-back policies typically return somewhere around 4-6% a year, which is close to or below inflation. They combine a small amount of life cover with a weak investment return and charge for both. Term insurance for protection and separate investments for growth almost always produce more of each for the same money.
Work out what yours actually returns
Take your annual premium, the number of years you pay it, and the total maturity amount including bonuses. Put those into an XIRR calculation in any spreadsheet. Most people doing this for the first time are surprised, because the maturity figure looks large in absolute terms and the policy was sold on that figure rather than on the rate.
A policy paying ₹50,000 a year for twenty years and maturing at ₹22 lakh sounds substantial. It is a return of roughly 5% a year. The same ₹50,000 a year into a broad equity fund at 11% over twenty years would be close to ₹36 lakh, and would have come with no life cover, which is why the comparison has to include buying term insurance separately.
Why these policies sell so well
Three reasons, and none of them is the return. They are sold in person by someone known to the family, often at a moment when the family is thinking about security. They pay something back, which term insurance does not, and people dislike paying for something that might pay nothing. And they double as a tax deduction under Section 80C, which makes the purchase feel productive in March.
The 80C point is worth examining. Several instruments qualify under the same section, and some of them return considerably more. The deduction is not a reason to prefer one over another.
If you already hold one
Surrendering is not automatically the right move. Early surrender values are punitive, and the loss can be larger than the ongoing drag.
Work out three numbers. What you get if you surrender today. What you get if you stop paying and let it become paid-up. And what you get if you continue to maturity. Compare each against what the future premiums would do elsewhere. Sometimes continuing is right because most of the cost is already sunk. Sometimes making it paid-up and redirecting future premiums is clearly better.
Whatever you decide, buy term cover first if you have dependants, because surrendering a policy also surrenders whatever life cover came with it.
Product features, surrender values and tax treatment vary by policy and change over time. This is general educational information, not a recommendation about any specific product.
ONE MOVE THIS WEEK
Find one policy document and calculate its XIRR. Fifteen minutes, and the number will tell you more than the agent did.
