ULIPS ( Unit Linked Insurance Plans) which were hailed by insurance agent and companies as magic wands capable of giving you the triple benefits of insurance, investment and tax-savings, are suddenly being branded unappealing, as they are market linked and thus, volatile. “ The value of your investments in ULIPs can vary, so it is better to invest in endowment plans”, goes the new sales pitch. Insurance agents promise potential costumers that endowment plans offer stable returns in the form of bonuses declared by an insurance company every year in addition to providing a life cover.

While people often talk about the high commission structure of ULIPS, there is little focus on endowment plans where the charges are simply not revealed. If the commissions are in the range of 8-10% in the case of ULIPS, in endowment plans it could be as high as 30-40% in the first year.

The high commissions in endowment plans are one of the important reasons for selling endowment plans. What’s more, with IRDA categorically ruling out measures to cap charges on traditional policies, it seems that the new form of mis-selling is here to stay for some more time.

Some facts about endowment plans……..

A. Plan lacks transparency

As per IRDA regulations, endowment policies invest more in debt or government securities(the amount may sometime be as high as 90% of the total amount) and very little in equities. Consequently, they cannot generate returns comparable to ULIPS with an equity component. Most endowment policies yield returns of around 5% per annum, which at best could go up to 6% in some cases. But the fact is, there is no clarity in actual return generated in endowment plans as an insurance company is under no obligation to reveal where your money is being invested. To top it up, agents are putting this lack of transparency to good use by telling prospective customers that unlike ULIPS these plans have no charges and all their money gets invested.

But, actually endowment plans have higher charges than ULIPS. It’s just that the insurance company is not obliged to give an exact breakdown as is the case with ULIPS.

B. Low returns & High charges

In an endowment policy, a policyholder is insured for a certain amount. This amount is referred to as cover (or Sum Assured). Over and above this, an insurance company announces a bonus, which is a certain percentage of the cover, from time to time. When the policy matures the accumulated bonus as well as the sum assured is paid out. But one major un disclosed fact about bonus is that in most of cases and across almost all insurance companies , it is not compounded year on year till maturity. So if a policy announces a bonus of Rs.50000/- at 5% ( S.A – 10Lacs & tenure 25 yrs) in 1st year, remains Rs.5000/- through-out 25 years.

Ignoring the principle of compounding is primarily why at maturity, the returns are unable to break the 5-6% barrier. This is inadequate if you have a long term horizon in mind as there are better investment avenues at your disposal.