Investing in endowment policies can be frustrating

K. ARAVIND

Those who take out a traditional endowment policy in the hope of a higher return will be disappointed. Money made through hard work without understanding the terms and conditions of the policy and trusting only the words of the agents will not get the required protection or return if invested in such products.

It is a fact that consumers are deceived by agents when selling products that combine investment and insurance, including endowment policies. Consumers should try to buy the policy only after learning about the policy without falling prey to the baseless temptations of agents about the benefits of the policy. Such policies should be avoided, recognising that insurance is not for investment.

Insurance agents are particularly interested in selling endowment policies because the commission is so high. The commission on sale of an endowment policy is 25 per cent of the first year premium. The agent receives a commission of 7.5 per cent of the premium for two and three years and 5 per cent of the premium from the fourth year. It is only natural that insurance agents would try to maximise sales by targeting this huge commission. Therefore, they do not have to disclose many things to look out for when buying an insurance policy.

Most endowment policies state the sum assured. This amount is received after the policy term. But some policies do not say so. It is too late when those who have taken such policies realise that the amount of death benefit will be received even after the completion of the policy term.

The basic premise is not to confuse insurance with investment. Life Insurance provides for the long-term protection of the family’s financial status in the event of an untimely death of the family’s source of income. This goal is fully achieved through term policies aimed at higher insurance coverage. These are also known as protection policies. Term policies with the sole purpose of life insurance are available at a relatively low premium compared to the sum insured. At the same time endowment policies have to pay a very high premium to get this much coverage.

In addition to taking out a term policy for life insurance, you should opt for mutual funds, PPFs and schemes like the Senior Citizen Savings Scheme for investment.