Most endowment plans have low underlying returns

Published in Mint on, Dec 18 2012, Written by Kapil Mehta

I bought a term insurance plan of Rs.50 lakh in 2010. My salary has increased and I want the amount to be Rs.90 lakh. Should I buy another term plan of Rs.40 lakh or is there a way to increase the amount in the existing plan? Which will be cheaper?
—Raghu

Term insurance rates have fallen considerably over the past few years. A person who may have purchased a term insurance in 2008 at age 40 and replaced the policy with an equivalent insurance in 2012 when he was 44 would have saved at least 30% in premiums.
So first determine the cost of purchasing a fresh term insurance of Rs.50 lakh. I suspect it will be cheaper. If that is the case, then purchase a new policy worth Rs.90 lakh. Otherwise buy a new policy worth Rs.40 lakh. Insurers do not allow you to enhance the sum assured in an existing plan.
If you do decide to replace your entire plan, make sure that the new policy is issued to you before you lapse your current term plan. The last thing you want is to lapse your current Rs.50 lakh plan only to find out later that your application for a Rs.90 lakh plan has been declined or loaded because of a medical condition.

I bought four endowment plans four years ago and the total premium outgo is Rs.60,000. I recently realized that term policies are cheaper? Should I stop the four plans and go for a term plan?
—Mukesh Jha

The purpose of a term plan is different from that of an endowment plan. Term plans provide financial security to your family if you die. If you survive the policy term, you don’t get any money back. However, endowment plans are essentially investment options where the death benefit is relatively low.
You must cover yourself for early death with a term insurance. Make sure the death benefit is 10 times your annual income. If you have money left to invest, then evaluate mutual funds, fixed deposits and unit-linked insurance plans.
Most endowment plans have low underlying return. However, there can be a sizeable surrender charge if you discontinue the policy. Compare the surrender charge with the higher returns you may get in other investments to decide whether or not to continue the endowment plans.

I paid premiums for my policy for 17 years and then stopped paying since January 2007. I would now like to pay the premium and make my policy active. How do I do that?
—Mukhmal

I am afraid the insurer will not renew your policy as more than five years have elapsed since you last paid a premium. As you have paid premiums for 17 years, there will be an accumulated cash value that you should withdraw. You will need to submit an application to the insurer to receive the surrender value. This may be less than the cash value because of surrender charges.

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