Are you holding endowment policies or ULIPs?

Are you holding any of the endowment policies or ULIPS? If yes, then you should be definitely reading this one.

I have never help ULIPS and had an endowment policy once. I did not buy it for myself, however when i started earning, my dad gifted this to me. This was based on the traditional wisom, most of the people from his generation would know this. Anyways, I was very happy then that I was saving tax, completely ignorant on the personal finance topic.

This endowment policy from LIC was bought in July 2006, was of 25 years term and insured me for 10 lakhs and was costing me around 37,600 per year. Historically, when such a policy is redeemed it would have given me around 20 lakhs plus.

In the year 2012, when I was also learning the concepts of future value and how to compare value of annuities etc.during my MBA, I decided to analyze this one as I always had a feeling that this is not something that is right for me.

What I observed:

• If I receive 20 lakhs at the end of 25 years, for an annual investment of 37,600 for 25 years, the pre-tax rate of return comes out to meagre 6%, even a PPF has much higher, at-least then. 
• The insurance of 10 lakhs is nothing for the kind of cover I needed. I was looking at a cover of at-least 1 crore to cover the liabilities I had then. 
• Disclaimer: I did not consider the 80C benefits from the policy, as I was paying a home loan and principal payment and PPF easily covered much more than allower limit. 

What I realized

• To get a tax free return after 25 years, I could have simply put that money in PPF or even in equity funds 
• In PPF at the rate of 8% I would have needed 28,000 annually to generate similar returns. 
• In equities at the rate of 14% I would have needed just 11,500 annualy. 
• I could easily buy a term insurance of 1 Crore for life (endowment insured for 25 years only for one-tenth amount) at cost of 12,500 annually
• Now, considering the term was 25 years, I would have gone for equities mostly, and would have had a much better deal in 34,000 (11,500 + 12,500) annually, with a flexibility to tweak my equity invesments whenever I like. 

I had to convince my dad that it makes sense to surrender the policy, the concept of sunk cost is very useful while making such decisions. And i did surrender the policy, even after I had paid the installements for 8 years.

Similarly, ULIPS also are mixed products - providing equity investments and insurance together. And if you analyze them then you are easily better off by having more insurance and better returns when you buy these separately.

Hence, I would recommend to anyone

• If you don't have it, don't bother you don't need them anyways 
• if you have it, then get out of them as soon as possible (in most cases, except the ones when you are very near to endowment policy maturity)

Feel free to reach out, if you want more details on the subject.

Happy to help.