Chapter 10 of 12
Endowment Plans - The Truth
Why traditional policies give 4-5% and agents still push them.
The visit had been scheduled for three weeks. Parun's village uncle, everyone called him Mama, had announced he was coming to discuss "something important about your future." Parun's mother had made extra sweets. His father had cleared the good chair in the sitting room.
Mama arrived carrying a manila folder with the LIC logo on it.
He opened with the customary pleasantries, "You've put on weight, that's good, you were too thin in Germany." Then he opened the folder.
"LIC Jeevan Anand. Endowment plan. Participating, with bonus. Thirty years. You pay Rs 1.5 lakh a year. At maturity, you get back the sum assured plus all accumulated bonuses, guaranteed. Also life cover throughout."
Mama looked very pleased. He had done his research. He had the illustrations ready.
Parun had also done his research. He had two days to understand this product before Mama arrived. He used them well.
What Is an Endowment Plan?
An endowment plan is a life insurance policy that pays out the sum assured either on the death of the policyholder during the term OR on survival to the end of the policy term (maturity). It bundles life insurance with a savings component, and generally delivers poor returns on both.
The emotional appeal is real: you either leave money for your family (if you die) or you get a big payout when you retire (if you survive). Versus term insurance where "nothing happens" if you survive, which makes people feel like they wasted money.
The flaw in this logic: the insurance you get is inadequate, and the returns you get are terrible. You are paying a large premium for two mediocre products wrapped in one attractive-sounding package.
Inside LIC Jeevan Anand: What the Numbers Actually Say
Mama's illustration for Parun:
- Age: 32
- Annual premium: Rs 1,50,000
- Sum Assured: Rs 15 lakh
- Policy Term: 30 years
- Maturity benefit (guaranteed): Rs 15 lakh
- Plus reversionary bonus: approximately Rs 18 to 22 lakh (LIC's historical bonus rate applied, not guaranteed)
- Total expected maturity value: Rs 33 to 37 lakh
Parun's response: "Uncle, let me calculate the actual return."
Annual outflow: Rs 1,50,000/year for 30 years Total paid in: Rs 1,50,000 x 30 = Rs 45,00,000 (Rs 45 lakh)
Scenario 1 (guaranteed only): Rs 15 lakh at maturity IRR: deeply negative (you paid Rs 45L for Rs 15L back), impossible, so the bonus is the point.
Scenario 2 (with bonus, optimistic): Rs 37 lakh at maturity IRR calculation on Rs 1.5L/year for 30 years, receiving Rs 37L: Using IRR formula: approximately 4.2% per annum
Scenario 3 (with bonus, conservative): Rs 28 lakh at maturity IRR: approximately 3.1% per annum
For reference:
- Inflation rate: approximately 6% per annum
- PPF (government-guaranteed): 7.1% per annum
- FD (5-year, major bank): 7 to 7.5% per annum
- Nifty 50 CAGR (30-year historical): approximately 13-15% per annum
An endowment plan at 3.1 to 4.2% IRR beats nothing except keeping your money in a savings account.
Mama shifted in the good chair.
The Bonus Is Not What It Seems
LIC endowment plans advertise "reversionary bonuses", annual bonus added to the sum assured. The 2024-25 LIC Simple Reversionary Bonus for Jeevan Anand: Rs 40 per Rs 1,000 sum assured per year.
On a Rs 15 lakh sum assured: Rs 40 x 1,500 = Rs 60,000/year in bonus additions. Over 30 years: Rs 60,000 x 30 = Rs 18 lakh accumulated (simple, non-compounding).
Final Accrued Bonus: Rs 18 lakh. Total payout: Rs 15 lakh (sum assured) + Rs 18 lakh (bonus) = Rs 33 lakh.
But here is the catch: this Rs 18 lakh bonus accumulated over 30 years is simple interest, not compound. Your money has not compounded. Rs 18 lakh in bonus added linearly over 30 years on Rs 1.5 lakh/year premiums is... not impressive math.
When an agent says "bonus of Rs 40 per Rs 1,000 every year," this sounds like compounding. It is not. The bonus is a flat amount added to the sum assured each year, simple accumulation. The effective return on your premium is still in the 3 to 5% range. Compare this to Rs 1.5 lakh/year compounding at 12% CAGR in an index fund for 30 years: approximately Rs 3.6 crore. The gap is enormous.
The Comparison Parun Made for Mama
| Factor | LIC Jeevan Anand (Endowment) | Term + PPF | Term + Nifty 50 Index Fund |
|---|---|---|---|
| Annual cost | Rs 1.5 lakh | Rs 1.5 lakh | Rs 1.5 lakh |
| Life cover | Rs 15 lakh | Rs 1 crore (Rs 10K term) + PPF | Rs 1 crore (Rs 10K term) + MF |
| Annual investment into growth | NIL (all to insurer) | Rs 1.4L into PPF at 7.1% | Rs 1.4L into index fund at ~12% |
| 30-year corpus | Rs 33-37 lakh | Rs 1.6 crore (PPF) | Rs 3.5+ crore (index fund) |
| Effective IRR | 3.1 to 4.2% | 7.1% (guaranteed) | ~12% (market-linked, historical) |
| Liquidity | Surrender = heavy loss | Partial withdrawal after 7 years | Fully liquid anytime |
Mama looked at the table. "But what about the safety? PPF and LIC are government-backed."
Parun: "PPF is government-guaranteed AND gives 7.1%. That's twice the endowment return. And term insurance gives Rs 1 crore of cover. This plan gives Rs 15 lakh. If I die at 40, my family gets Rs 15 lakh from LIC. That's not enough for one year's expenses."
The Money-Back Plan Variation
Mama also had a backup: LIC Jeevan Shiromani, a money-back plan.
"Every few years you get money back. It feels like income."
LIC Jeevan Shiromani (money-back plan):
- Annual premium: Rs 1.5 lakh
- Survival benefits paid out at specified intervals: 30% of sum assured at year 14, 40% at year 18, etc.
These payouts feel like income. But they are your own money being returned to you, minus the cost of the insurance and the drag of low returns.
The actual IRR when you calculate all inflows and outflows: approximately 4.5 to 5.5% for money-back plans.
Parun calculated it in front of Mama. "Uncle, I can put Rs 1.5 lakh/year in a liquid debt fund at 7%, and withdraw Rs 50,000 every year if I want 'income.' I'd have more money AND flexible timing."
Mama said he would "think about it."
What To Say When You Need To Say No
Endowment plan sales pitches exploit three emotional levers:
1. "Something is guaranteed": Yes. Guaranteed 4% returns. PPF also guarantees, but at 7.1%.
2. "If you die, your family gets money. If you live, you get money": Yes. But the death cover is too small and the survival benefit gives bad returns. Term insurance gives 5 to 10x more death cover for a fraction of the premium.
3. "LIC is government-backed, it is safe": LIC is credible and will pay. The returns you get from it, however, are not subject to government guarantee. They depend on the bonus declarations which LIC's board decides annually.
Scripts for politely declining:
- "I already have Rs 1 crore of term cover. My life insurance need is sorted."
- "My CA tells me to keep insurance and investment separate. I follow that discipline."
- "I have been investing in PPF for guaranteed returns. The endowment IRR is lower than PPF."
- "I appreciate the thought, Mama. I'll tell you if I change my approach."
What Parun Did Instead
After Mama's visit, Parun:
- Already had Rs 1 crore term plan (Rs 9,800/year, Max Life)
- Started PPF account: Rs 1.5 lakh/year (Rs 12,500/month), same amount Mama's plan would have cost, government-guaranteed at 7.1%, tax-free maturity
- Continued his index fund SIPs (Rs 50,000/month)
At retirement, assuming PPF at 7.1% for 30 years: approximately Rs 1.4 to 1.6 crore from PPF alone. Plus index fund corpus. Plus term cover protecting everything in between.
Mama's plan would have given Rs 33 to 37 lakh in the same period.
Key Takeaways
- Endowment plans deliver 3 to 5% IRR: below inflation, below PPF, far below long-term equity returns
- The bonus is simple accumulation, not compound growth: the math looks much less impressive when you run the IRR
- Life cover in endowment plans is typically 10 to 20x annual premium: far too thin for most families
- Term insurance (Rs 10,000/year for Rs 1 crore cover) leaves Rs 1.4 lakh to invest in PPF or index funds
- PPF at 7.1% (government-guaranteed) already beats endowment plans significantly: no need to take the endowment's complex structure
- The emotional appeal of "getting money back if you survive" does not survive mathematical scrutiny
For the ULIP version of this same problem, see ULIP Explained. For why the separation principle is the foundation of good financial planning, read Why Insurance Should Never Be Your Investment.
An endowment plan costs Rs 1.5 lakh/year for 30 years and pays Rs 37 lakh at maturity. An alternative is a term plan at Rs 10,000/year plus PPF at Rs 1.4 lakh/year (7.1% for 30 years). Which gives a better financial outcome?