Endowment Policy Vs. Combination of Term Insurance and PPF

Term Insurance is the best way to provide the cover for one’s life. Currently there are lot of term insurance plans available in the market and the premium is getting cheaper, thanks for the competition.

I talk to people and ask them whether they have term insurance or not and in reply I got different-different answers. Some say they do have term insurance (very few), some say they have endowment policy and ULIP and some say they do not have but they are planning to purchase.

Here I want to talk the reason people gives about purchasing endowment policies. Surprisingly most of the people taken endowment policy not for life cover but for getting tax benefit and getting return’s at the time of maturity.

When I asked instead of endowment policy why didn't you taken term insurance and the reason they said is there is no return in term insurance.

So in this blog I am going to explain one alternative to endowment policy so that people can purchase the term insurance and also get the more return’s with the same amount you have invested in endowment policy.

We are not going to calculate how much term insurance we required since it varies from person to person.

For the calculation purpose we will take 1 L every year as the amount to be invested for the period of 20 years.

1. Purchase endowment policy   

If I choose to invest full 1 lack in typical endowment policy I will get the following benefits:-           a) Life Cover = 20 lacks  b) Maturity Amount = 20 L + 16.8 L (Bonus) + 1.4 L (final additional bonus) + 6 L (loyalty addition).  
Here we have invested 20 L and end the end of policy term we get 44.2 L.

2. Term Insurance policy + PPF 

I choose to purchase a term insurance with 1 Cr cover. For 25 year old person it will cost around 7000 INR. Still we have 93000 INR to invest. Now invest remaining 93000 INR in PPF, where our investment will get the tax benefit and maturity amount is also tax free. Let’s consider PPF interest is 8% which is much lower than average interest rate from last 20 years. PPF maturity will be computed on 93000 INR for 20 years at the rate of 9.97% yearly compounding.

       Total maturity of PPF = 62.5 L 

From point 1 and 2 we have following findings. 

If Insured person died : 

Below table shows year wise amount which nominee can claim in case of insured person died.

Policy Year	Endowment Policy	Term Insurance + PPF
1	200000	10093000
2	2084000	10186000
3	2168000	10306816
4	2252000	10439677
5	2336000	10585785
6	2420000	10746460
7	2504000	10923155
8	2588000	11117465
9	2672000	11331149
10	2756000	11566137
11	2840000	11824552
12	2924000	12108732
13	3008000	12421245
14	3092000	12764916
15	3176000	13142850
16	3260000	13558464
17	3344000	14015515
18	3428000	14518134
19	3512000	15070864
20	3596000	15678702

Note:- Apart from the claim amount mentioned in the above table endowment policy will give 7.4 L to nominee after the completion of policy term as final additional bonus and loyalty additional bonus.

Did you notice the huge difference?

At the Time of Maturity:

	Endowment Policy	Term Insurance + PPF
Life Cover	20 L	1 Crore
Maturity Amount	44.2 L	62.5 L

Above tables clearly shows which is more beneficial. If you replace PPF with good equity mutual fund then maturity amount can be significantly more.

So the point is purchase a term insurance (if you need a life insurance) and if you need return then do investment. Do not mix both. 

Thanks for the DrAk Singh and Ashal Jauhari for pointing the flaw in the assumption of bonus.

Thanks for Ramesh Mangal for providing the link of bonus information.

Updated Disclaimer :-

1. For computation of endowment policy bonus I have taken estimate average of 4.2% p.a. of the sum assured. Bonus information for last 10 years is taken from LIC website. Bonus information can be checked here. I have taken "Final Additional Bonus" = 7% of SA and "Loyalty Bonus" = 30% of SA.

2. For PPF interest calculation I have taken the average of last 20 years interest paid by PF office. Same can be found here.