Term insurance plus investing the difference usually beats an endowment policy on both cover and the money at the end. Sunil was offered an endowment plan at ₹1,00,000 a year for 20 years showing ₹30 lakh at maturity, a return of about 3.7% a year. ₹1 crore of term cover for about ₹12,000 a year leaves ₹88,000 a year to invest.
How do you work out an endowment plan's return?
An endowment policy, often sold as a traditional plan or, at a bank branch, a savings plan, takes a fixed premium each year and pays a lump sum at maturity, or the sum assured plus bonuses on death. Its return is the IRR of an insurance policy's cash flows: the one yearly rate at which every premium, compounded to maturity, adds up to the maturity value.
From the benefit illustration you need the premium, the years paid and the maturity value. Insurers show maturity values at two assumed investment returns set by IRDAI, 4% and 8% a year in 2026, and only the guaranteed part is promised; reading a benefit illustration explains the columns. A spreadsheet's RATE function does the arithmetic: =RATE(years, -premium, 0, maturity value, 1), where the final 1 means each premium is paid at the start of the year. Run it on the 8% column and on the guaranteed figure: the first is the illustrated case if bonuses hold up, the second is all the plan promises.
Sunil's offer: 3.7% a year, against term plus invest
Sunil is 30, earns ₹28 lakh a year and does not smoke. The plan offered costs ₹1,00,000 a year for 20 years, carries ₹10,00,000 of life cover and illustrates ₹30,00,000 at maturity in the 8% column.
He pays ₹20,00,000 and gets ₹30,00,000 back. Spread over 20 years of premiums, that gain is only about 3.7% a year: =RATE(20, -100000, 0, 3000000, 1) returns 3.72%. The maturity value is tax-free under section 10(10D) of the 1961 Act, since the premium is no more than 10% of the sum assured.
The alternative is term plus invest: a ₹1 crore term plan to age 60 costs a 30-year-old non-smoker about ₹8,000 to ₹15,000 a year in 2026, depending on the insurer and his health; take ₹12,000. The other ₹88,000 goes into an equity fund on each premium date.
At an assumed 8% a year, the ₹17,60,000 invested grows to about ₹43.5 lakh in 20 years; at an assumed 12%, to about ₹71 lakh. Both are 2026 assumptions, not promises. To match the endowment's ₹30 lakh, the ₹88,000 needs only about 4.8% a year.
Since 23 July 2024, long-term gains on equity fund units held over a year are taxed at 12.5% above ₹1.25 lakh a year, plus 4% cess. Selling everything just after year 20, the 8% figure falls to about ₹40.3 lakh after tax, still above the tax-free ₹30 lakh. Meanwhile his family is covered for ₹1 crore instead of ₹10 lakh plus any bonuses declared, and the term plan runs ten years past the endowment's end, for ₹12,000 a year more.
Does term plus invest still win at ₹2 or ₹3 crore of cover?
₹1 crore is not his full need. The 10 to 15 times income rule of thumb points to ₹2.8 crore to ₹4.2 crore at ₹28 lakh, and the insurance planning guide shows how loans, goals and savings move that figure. Larger covers cost roughly in proportion, leaving less to invest.
| Term cover | Yearly premium | Invested a year | After tax at an assumed 8% | After tax at an assumed 12% |
|---|---|---|---|---|
| ₹1 crore | ₹12,000 | ₹88,000 | about ₹40.3 lakh | about ₹64.2 lakh |
| ₹2 crore | ₹24,000 | ₹76,000 | about ₹34.8 lakh | about ₹55.5 lakh |
| ₹3 crore | ₹36,000 | ₹64,000 | about ₹29.3 lakh | about ₹46.8 lakh |
The after-tax figures assume all units are sold in one year at today's rates, with no other equity gains that year and no surcharge. Against the endowment's tax-free ₹30 lakh, only the ₹3 crore row at 8% falls short, by about ₹65,000, and that row carries thirty times the endowment's cover for all 20 years.
Why do endowment plan returns come out so low?
Part of each premium pays for the life cover, part for the insurer's costs and, in the first years, a large share for the seller's commission, which how insurance commissions work sets out. What remains is invested largely in bonds and comes back as bonuses, which are not guaranteed until the insurer declares them.
The 3.7% also assumes all 20 premiums are paid. Stopped after the first year, the plan becomes a reduced paid-up policy, paying a smaller sum at maturity; stopped earlier, it lapses. Surrendering returns a surrender value, usually well below the premiums paid. A term plan stopped early ends, and the money invested beside it stays his.
Plans differ (the insurance planning guide's 30-year example implies about 5% to 6% a year), so run RATE on yours.
What does the endowment give that term plus invest does not?
The guaranteed part of the maturity value does not depend on markets, the payout is tax-free within the section 10(10D) limits, and a yearly premium enforces the saving. Term plus invest leaves that discipline to you, and its value will rise and fall. Sunil can weigh those three against a return of about 3.7% a year and ₹90 lakh less cover.
Dhi looks at your protection, cash flow, net worth and goals together, and answers questions from your own numbers about a policy you are offered. Dhi earns no commissions and never mis-sells.
Frequently asked questions
This is general information for salaried individuals in India, not personalised financial advice.
