What these plans are
A single premium doing two jobs: providing life cover, and building a sum paid to you if you survive the term.
Endowment pays a lump sum at maturity, or the sum assured on earlier death. Money-back is the same structure with periodic payouts during the term rather than everything at the end. Both are typically “participating” policies, meaning the final amount includes bonuses declared by the insurer that are not guaranteed in advance.
Their appeal is real and behavioural: you get something back, the commitment is enforced by the premium schedule, and the outcome feels safe. Those are genuine benefits and they are worth naming honestly before examining the cost.
Why one premium cannot do both jobs well
The structural issue, stated plainly: every rupee allocated to building the maturity value is a rupee not buying cover, and every rupee buying cover is a rupee not compounding.
What this produces in practice is a policy with a sum assured that is a small multiple of annual income — far below what dependants would actually need — alongside a return that is unremarkable. Neither job is done well, because the premium was split between two objectives that pull against each other.
Compare with the unbundled alternative: term cover buys a sum assured many times larger for a fraction of the premium, precisely because none of it is being set aside to return to you. The remainder is then free to be invested wherever it belongs.
Compute the return yourself
Here is the two-minute calculation the illustration will not do for you.
You have a series of cashflows: premiums paid out on known dates, and a maturity amount received on a known date. That is exactly the input XIRR takes.
- List every premium as a negative amount, on its due date.
- List the maturity value as a positive amount, on the maturity date. For a money-back plan, list each interim payout on its date too.
- Apply the XIRR function in any spreadsheet.
That single figure is the annual rate of return the policy is actually offering, and it is the only number that makes it comparable with anything else. Whatever it turns out to be, you now know it — which you did not before, because the illustration presents a large maturity value and never divides it by the time and money that produced it.
Two cautions when you run it. Use the guaranteed figures for a floor, since bonuses are projections and not promises — many illustrations show an optimistic scenario alongside. And remember the result is a blended number: it includes the value of the life cover you received along the way, so it is not a pure investment return. The fair comparison is against term premium plus a separate investment, not against an investment alone.
Exiting early is where the real cost sits
These are long contracts, commonly fifteen to twenty-five years, and a large share of policyholders do not complete them.
Surrendering early returns a surrender value that is substantially less than premiums paid, particularly in the early years — because acquisition costs and commission are front-loaded into the first years' premiums. Regulation sets minimum guaranteed surrender values and the point at which they become payable, and those rules have been revised, so check the current position for your policy.
The alternative to surrendering is making the policy paid-up: stop paying premiums and retain a reduced sum assured, with a proportionately reduced maturity value. It avoids crystallising the surrender loss and is frequently the better option for a policy several years in.
The decision is forward-looking. What you have already paid is gone either way and is not an argument for continuing. The question is only whether future premiums are better placed in this policy or elsewhere — and the XIRR on the remaining cashflows, not the original ones, is what answers it.
When they are defensible
Not never, and the honest cases are worth stating.
- When the enforced discipline genuinely works. Someone who would otherwise not save at all, and who has demonstrated that about themselves, may end up better off with a mediocre return actually achieved than a good return never started. That is a real argument.
- When absolute certainty of the amount matters more than the size of it, for a specific obligation on a specific date.
- When it is already several years old. The front-loaded costs are sunk; continuing or making it paid-up may both beat surrendering.
What is not a good reason is a deduction on the premium. A deduction lowers the cost of a product; it does not make a poor product good, and buying in March against a deadline is how people end up with the wrong policy at the wrong size.
Before signing anything
- What is the XIRR on the guaranteed figures alone?
- What sum assured does this premium buy, and what would the same premium buy as term cover?
- Which parts of the maturity value are guaranteed and which are projected?
- What is the surrender value at year 3, year 5, year 10?
- What is the total premium outlay over the full term? Stated as one number, in rupees.
Any of these that cannot be answered plainly is itself an answer.
FNOTrader does not sell insurance, is not a SEBI-registered investment adviser, and does not recommend policies. This describes how to evaluate the structure.
The comparison worth running
The separation argument is arithmetic, and it should be tested rather than accepted.
Take the endowment premium, subtract the premium for term cover of the same or larger sum assured, and treat the difference as a monthly contribution. FNOTrader's Mutual Funds app runs exactly that against real NAV history — around 34 million NAV rows — reporting XIRR, final value and maximum drawdown, plus rolling returns across every start date.
Read the worst window, not the average. The endowment's advantage is certainty, so the honest comparison is against the unlucky case rather than the typical one.
Common questions
What is an endowment plan?
A life insurance policy where one premium does two jobs — providing cover and building a maturity amount paid if you survive the term. A money-back plan is the same structure with periodic payouts during the term rather than a single sum at the end.
Why is the return on an endowment plan never stated?
Because the illustration gives the premium, the sum assured and the maturity value without dividing the outcome by the time and money that produced it. The implied annual rate is computable in minutes and is rarely flattering.
How do I calculate the return on my policy?
List every premium as a negative amount on its due date and the maturity value as a positive amount on its date, then apply the XIRR function in a spreadsheet. Use the guaranteed figures for a floor, since bonuses are projections rather than promises.
Why do endowment plans have low sum assured?
Because every rupee allocated to building the maturity value is a rupee not buying cover. Term insurance provides a sum assured many times larger for a fraction of the premium precisely because none of it is set aside to return to you.
Should I surrender my endowment policy?
The decision is forward-looking — what you have already paid is gone either way. Compute the return on the remaining cashflows rather than the original ones, and consider making the policy paid-up, which retains reduced cover without crystallising the surrender loss.
What does making a policy paid-up mean?
Stopping premium payments while retaining a reduced sum assured and a proportionately reduced maturity value. It avoids the surrender loss and is often the better option for a policy several years in.
Are endowment plans ever a good choice?
They can be, where enforced discipline genuinely works for someone who would otherwise not save, or where certainty of a specific amount on a specific date matters more than its size. A tax deduction is not a good reason — it lowers the cost of a product without improving it.
Why is the surrender value so low in early years?
Because acquisition costs and commission are front-loaded into the first years' premiums. Regulation sets minimum guaranteed surrender values and when they become payable, and those rules have been revised — check the current position for your policy.
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