Big Story | The 6 best endowment plans: Protect your capital and get guaranteed returns

With the stock market collapsing like a house of cards and turning more volatile with every trading day, it is time that you invest a portion of your portfolio in vehicles that protect your capital.

One such option is endowment insurance plans, which, along with capital guarantee, give a minimum assured return. An endowment policy is one where the policyholder pays premium for a certain number of years and at the end of the policy term, gets a lump-sum amount.

Endowment plans of life insurers come with tax benefits (provided sum assured is 10x premium). Under Section 80 C of the I-T Act, the premium paid towards insurance policies, including endowment products, is allowed as a deduction (up to ₹1.5 lakh) from income. Under Section 10(10D), maturity proceeds from insurance are tax exempt. So, after factoring these benefits, returns from an endowment plan become comparable with most other long-term investment options including bank fixed deposits.

Endowment plans are widely compared with post office savings schemes, but one needs to note that in the case of the Public Provident Fund, the interest rates are revised every quarter and there is a limit to how much you can invest.

Investors looking for capital guarantee or are conservative and happy with lower but guaranteed returns, can go for endowment plans. In fact, we suggest locking into some of these plans, such as ICICI Prudential Assured Savings Insurance Plan (ASIP) and HDFC Life’s Sanchay Plus, straight away as rates may drop with the interest-rate cycle moving down.

However, one needs to be aware of a few facts about endowment plans — they come with high surrender charges and the bonuses in participating endowment plans are not guaranteed. Here, we list the six best endowment plans for you:

Non-participating (non-par) endowment plans give guaranteed returns to policyholders. At present, the IRR (internal rate of return) in these plans vary between 4 per cent and 5.5 per cent. We have picked the top plans here.

1. HDFC Life Sanchay Plus

This is a non-par, non-linked, savings insurance plan that offers guaranteed returns. Any one aged 60 years or less can buy this policy. You can pay the premium monthly/quarterly/half-yearly/annually.

The policy offers four options — guaranteed maturity, guaranteed income, lifelong income and long-term income.

In the guaranteed maturity option, the maturity benefit is paid as a lump sum at the end of the policy term, which is 10/12/20 years based on what you choose as the premium payment term, which can be five/six/10 years.

(Policy term refers to the entire period of the policy over which the risk cover and other benefits of the policy will be given to the investor; premium payment term is the period over which the policyholder will have to pay the premium). In the guaranteed income option, the benefit is given in the form of income payouts throughout the policy term.

In the lifelong income option, payouts happen till the person turns 99 years old.

In the long-term income option, income payouts go on for 25 years.

Note that, in all the options, the income payouts start two years after the premium payment term.

The maturity benefit under the policy’s option 1 is: the guaranteed sum assured (ie, the total annualised premium) plus guaranteed additions. The policy document specifies the intervals in which these guaranteed additions will accrue.

In options 2, 3 and 4, the guaranteed income is equal to a percentage of the annualised premium, depending on the insured’s age and the premium payment term. In options 3 and 4, at the end of the policy term, all premiums paid by the policyholder is also returned.

On death of the policyholder in any of these plans, higher of the sum assured (10 times the premium) or the maturity benefit (based on guaranteed additions declared till then) is paid. The minimum death benefit is 105 per cent of the premiums paid, in all endowment plans in the market.

How it fares: HDFC Life Sanchay Plus, last week, revised its returns 20-30 basis points lower. The plan’s IRR now is 5-5.5 per cent for a 40-year-old male. Note that longer the premium payment, higher will be the return.

Of the four options under the policy, the lifelong income plan gives the highest return — this a good option for people in their 50s who want to leave a legacy for their children.

Also, unlike most plans in the market, Sanchay Plus offers a lot of flexibility.

One can ask for a lump-sum settlement in place of annual income payouts any time. In the event of the death of the policyholder, the nominee can opt to receive the balance payouts as a lump sum.

Rating rationale: The product is superior to other non-par plans in the market in terms of product features and flexibility in settlement options.

2. ICICI Prudential ASIP

It is a non-par, non-linked endowment life insurance plan like HDFC Life’s Sanchay Plus.

It offers two premium payment options — five years and seven years — and two policy term options — 10 years and 15 years. The maximum age at entry is 60 years (it is 57 years if you choose the policy term of 10 years).

The maturity benefit is paid on the policyholder surviving the policy term. Maturity benefit is equal to accrued ‘guaranteed additions’ and a guaranteed lump-sum amount. Guaranteed additions are added to the policy at the end of each year and are equal to the guaranteed addition rate (which is 10-15 per cent depending on the policy term) multiplied by the sum of premium paid till that point; this though will be paid only at the time of the policy’s maturity.

The guaranteed lump-sum amount (which will also be paid at maturity) will be set at the beginning of the policy and will depend on the policy term, premium, premium payment term, age and gender.

On death of the policyholder, higher of the sum assured or the guaranteed maturity benefit is paid as per regulations.

How it fares: This is an easy-to-understand endowment plan. However, note that the maturity benefit comes as a lump sum and if you wish to receive regular cash flows, you will have to reinvest it.

For someone who’s 40 years old, the IRR comes to 5.1-5.7 per cent. This is the best in the market among non-par products.

Rating rationale: Simple features and industry-high IRR are positives. The product loses out on flexibility as policyholders cannot opt to receive the benefit amount as regular payouts.

3. SBI Life Smart Platina Assure

This is also a non-linked, non-par plan. Anyone 50 years old or younger is allowed to buy the policy.

The policy terms offered are 12 years and 15 years; thepremium payment terms are six years and seven years. On maturity of the policy, the benefit amount is paid. This is the sum assured under the policy plus accrued guaranteed additions. Guaranteed additions are equal to the rate of guaranteed addition (5.5 per cent or 6 per cent) multiplied by the cumulative premium.

The rate of guaranteed additions depends on one’s slab of sum assured. On death of the policyholder, the sum assured plus the guaranteed additions is paid to the nominee.

How it fares: The product is straight and simple. But note that people of over 50 years of age can’t buy this product. Quarterly and half-yearly premium payment options are not available.

Also, the minimum premium under the policy (for the annual option) is ₹50,000, while it is ₹30,000 for most others. And on maturity, there is no option but to take the benefit amount as a lump sum. The IRR in this plan comes to around 5.5 per cent.

Rating rationale: Easy-to-understand policy features and an IRR which is higher than the industry average for endowment plans, are advantages. But the plan loses out on product features, as it offers no option for regular payouts after maturity. Also, it curtails entry for people older than 50 years of age.

These plans guarantee a small portion of the maturity benefit; balance is dependent on bonus declarations by the insurer.

If the insurance company does well, you may make superior returns than those investing in guaranteed plans. But that said, there are chances that the company may decide not to declare any bonus or cut it sharply in some years.

We take more comfort in non-participating guaranteed return plans and hence have rated all the participating plans a notch lower.

4. LIC Jeevan Anand

This is a participating, non-linked whole-life endowment plan.

The maximum age at entry in this policy is 50 years. The minimum policy term is 15 years and the maximum is 35 years. It is a regular premium payment plan where the premium term is equal to the policy term.

Premiums can be paid in yearly, half-yearly, quarterly or monthly intervals.

The sum assured is paid on death and the maturity benefit on surviving the policy term. The maturity benefit is given as a lump sum and is the sum of all the accrued bonuses (if declared). In this plan, the insurance cover continues even after the policy term — the risk cover is for the whole life. So the policy gives benefit twice — upon maturity of the plan and on death, whenever that happens (before 99 years).

That is, a) if death happens during the premium payment term, the sum assured is paid and the policy is terminated; b) if death happens after the premium payment term, while the policyholder would have already been paid a lump sum at maturity, her nominee would be paid the sum assured.

How it fares: Bonus declared in this policy in 2018-19 was ₹41 for every ₹1,000 of sum assured (SA) for the policy term of 15 years, ₹45/1,000 of SA for the policy term of 16-20 years and ₹49/1,000 of SA for a policy term of more than 20 years. This is the highest bonus from any insurance company in the market.

Further, the expense structure of the plan is low. A back-of-the envelope calculation shows that expenses eat away only about 2.2 per cent of the returns.

Rating rationale: Of the participating plans from LIC, Jeevan Anand is the best. The plan, in fact, is the best in the market among all participating plans, given the consistency in bonus rate and a lower expense structure. Also, if the insured survives the policy term, she gets to receive the benefit amount one more time. When taking Jeevan Anand, however, pay attention to the fact that the minimum policy term is 15 years. Ensure that you can continue paying the premium continuously for such a long term. Also, given that LIC is eyeing an IPO, it may have to reduce the portion of profits it shares with policyholders to 90 per cent in future, from the current 95 per cent, which will reduce the bonus.

5. HDFC Life Sanchay Par Advantage

It is a non-linked, participating, whole-life (till 100 years old) plan. The maximum age at entry is 55-65 years depending on the plan option chosen.

The policy term is 100 minus age at entry. You can also choose a fixed policy term between 30 and 40 years.

Premium payment term options given are six, eight, 10 and 12 years. The premium can be paid monthly/quarterly/half-yearly or annually. The plan comes with two options — immediate income and deferred income.

The immediate income option provides regular income by way of cash bonuses (if declared) from the first policy year, and at end of the policy term, there is a lump-sum maturity benefit (this is equal to the total premium paid).

The deferred income option provides guaranteed income and cash bonus (if declared) from one year after completion of premium payment term. This continues till a period which is lower of 25 years or the number of years left to end of the policy term. The guaranteed income is a percentage of the annualised premium and depends on the age at entry and the premium payment term. On maturity, the sum assured (the total premium paid under the policy) along with terminal bonus, if any, is paid. On death, the sum assured is paid.

How it fares : Among the participating plans in the market, Sanchay Par Advantage gives the most flexibility. It allows one to accrue the income payouts and withdraw them fully or partly any time.

According to the company, the plan’s investment strategy allows for limited exposure to equity, facilitating generation of relatively higher returns over a longer term than other similar plans in the market. But given the returns are not guaranteed, one can’t bet on it.

You also need to note that unlike Jeevan Anand, here, one can’t eye benefit payments twice. If you choose 100 minus age at entry as the policy term because you want a whole-life risk cover, the benefit will come only once — either at death or at maturity which is when you turn 100 years, whichever happens first. Whereas, in Jeevan Anand, you get the maturity amount at the end of the policy term (15 years), and the life cover continues to give protection and the sum assured is paid to the nominee any time you die.

Rating rationale: It scores over Jeevan Anand in providing flexibility for the policyholders; also there is immediate liquidity through regular cash flow. The policy being available online for purchase is also a plus. However, you get the benefit only once — either at maturity or on death — unlike in Jeevan Anand. The expenses under the plan are not much. The difference between gross and net return comes to 2.5 per cent in the best case. Bonus rates (of reversionary bonus) vary between 3 per cent 5 per cent on different plans of HDFC Life. Sanchay Par Advantage is a new plan and doesn’t have a bonus history.

6. ICICI Pru Lakshya Lifelong Income

It is also a non-linked, participating, whole-life insurance plan. The premium payment term options given are 10, 12, and 15 years. The premium can be paid monthly/half-yearly/annually.

The policy term is 99 minus age at entry. Five years after the premium payment term, the income payouts start and they continue till the individual turns 99 years old or his death, whichever is earlier.

This income payout is in the form of regular cash bonus — which is paid if the company declares a bonus — and includes a guaranteed income too.

The guaranteed income is set at the time of policy inception and is based on the total premiums you agree to pay. The maximum age at entry into the policy is 50 years (for the 15-year premium term), 53 years (for 12 years) and 55 years (for 10 years premium term).

If the policyholder survives till the end (till 99 years), the total contribution in the form of premiums is paid back along with the terminal bonus, if any. On death of the policyholder, the nominee will receive the sum assured along with the bonus if any.

How it fares: The policy gives regular cash flows, and guarantees to return all premiums at maturity. However, note that the policy term is longer — 99 minus age at entry. So, it is possible only to take benefit either at maturity or death, whichever is earlier.

The difference between gross and net return in this plan comes to about 2-2.2 per cent, so there’s not much waste of returns in terms of expenditure. The bonus rates of ICICI Prudential have been 3.5-3 per cent in recent years.

Rating rationale:Unlike Jeevan Anand, there are no dual benefits here. But the policyholder gets regular cash payouts — it starts five years after the end of the premium payment term, while in Sanchay Par Advantage, it starts in the very first year in the immediate income option. Also, the plan offers no flexibility to the policyholder/nominee to accrue the payouts and collect them as lump sum at a later point.

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