Endowment and money-back, and the return inside

Traditional savings policies — endowment, money-back, guaranteed income plans — are the largest category of life insurance sold in India. They pay something whether or not you die, and that is their entire appeal.

What they are

Endowment. Pays the sum assured on death during the term, or a maturity amount if you survive it.

Money-back. The same, with periodic payouts during the term rather than everything at the end.

Guaranteed income / savings plans. Marketed on a guaranteed payout stream, structurally the same thing.

In each case, part of your premium buys life cover and the rest is invested by the insurer, who pays you a contractually defined amount later.

Why the cover is small

Your premium is doing two jobs, so each gets less.

A term policy for a 32-year-old might cost a few thousand rupees a year per ₹1 crore of cover. An endowment policy taking ₹1,00,000 a year will typically carry a sum assured measured in lakhs rather than crores.

Same money, an order of magnitude less protection, because most of the premium is being saved rather than spent on risk transfer.

For a household with dependants that is the decisive objection, and chapter 2 made it: inadequate cover leaves the family in materially the same position as no cover.

Why the return is never quoted as a rate

This is the chapter's central point.

These policies are sold in rupees, not in percentages. "Pay ₹1 lakh a year, get ₹25 lakh at maturity, plus life cover of ₹12.5 lakh." Every number is large and none is a rate.

The Anchoring and framing chapter in Behavioural finance explains why this works: ₹25 lakh against ₹15 lakh paid in is a big, concrete, favourable comparison, while the annual rate that connects them is a small number that invites comparison with everything else.

And the rate cannot be computed by dividing, because the payments arrive on fifteen different dates. It is an XIRR problem, which is exactly what the Measuring your return subject exists for — and which no brochure performs for you.

Note the contrast with unit-linked plans. IRDAI requires those to be sold with a benefit illustration disclosing the net yield and the reduction in net yield at stipulated gross returns, as chapter 4 sets out. For a traditional policy the comparable figure is not presented as a headline, which is why you have to compute it.

Surrender, and what the rules now give you

Most of these policies are not held to maturity. People stop paying — because circumstances change, or because they realise what they bought.

The surrender rules were improved with effect from 2024, and the position now is:

Guaranteed Surrender Value (GSV) is the contractual floor, rising with the number of years premiums have been paid.

Special Surrender Value (SSV) must, under the master circular, be "at least equal to the expected present value of" the paid-up sum assured on all contingencies covered, paid-up future benefits, and accrued or vested benefits, allowing for survival benefits already paid.

And on timing: SSV "shall become payable after completion of first policy year provided one full year premium has been received" — with policies having a limited premium payment term of less than five years, and single premium policies, payable immediately after the first full premium.

That is a genuine improvement. Under earlier regimes a policyholder who stopped after a year or two could receive very little or nothing. The floor is now the present value of what the paid-up policy would deliver.

It remains an expensive way to exit, because early-year costs have already been taken out and the present value of a reduced paid-up benefit is far below what you paid. The rule protects you from the worst outcome; it does not make surrender cheap.

The two questions

Before buying any of these, two questions settle it:

1. What is the annual return, computed as an XIRR over the actual dates? If the seller will not produce it, compute it yourself — chapter 6 is the method and the policy-return calculator does the arithmetic.

2. What would term plus a separate investment of the difference produce? This is the real alternative and the only fair comparison. Buy the cover you actually need as term, invest the remaining premium, and compare the outcome.

If the bundled product wins, buy it. The point of this chapter is not that it never wins — it is that almost nobody runs the comparison, and the product is designed so that running it is difficult.

Working the problem

₹1,00,000 a year for 15 years, maturity ₹25,00,000, sum assured ₹12,50,000.

The naive view: ₹15,00,000 paid, ₹25,00,000 received — a gain of ₹10,00,000, or 67%. This sounds excellent and means nothing, because the payments were spread over fifteen years.

The XIRR view. Fifteen outflows of ₹1,00,000 on fifteen annual dates, and one inflow of ₹25,00,000 at the end of year 15. Solving for the rate that makes those consistent gives approximately 5.2% a year.

Why so far below 67%. The first ₹1,00,000 was invested for 15 years; the last for under a year. The average rupee was present for about half the term, which is the recurring deposit arithmetic from Deposits and small savings appearing again. The denominator in the naive calculation is roughly twice too large.

What I would compare it against:

A PPF. Chapter 6 of Deposits and small savings gives 7.1% notified since April 2020, exempt at contribution, accumulation and withdrawal. A tax-free 7.1% against roughly 5.2% here — and the PPF has no insurance component, which is the point of the next comparison.

Term plus investing the difference. ₹1 crore of term cover for a healthy 32-year-old costs a small fraction of ₹1,00,000 a year. Suppose it costs ₹15,000. That leaves ₹85,000 a year to invest, and it buys eight times the cover this policy provides. For the bundle to win, its 5.2% would have to beat what ₹85,000 a year earns elsewhere — and it would still have to overcome being eight times under-insured.

A bank deposit. Even a taxable deposit at 7% nets about 4.9% at a 30% slab, which is in the same region as 5.2% — so the policy is roughly competitive with a deposit after tax, and well behind PPF, while locking the money for fifteen years.

The verdict I would give: the return is not scandalous, it is simply mediocre, and it is wrapped around a sum assured that does not protect the family. The failure is not the 5.2% — it is that the product was bought instead of protection, and the 5.2% was never shown.

The point

Endowment and money-back policies split your premium between cover and savings, so the sum assured is an order of magnitude smaller than term for the same money. They are sold in rupees rather than rates because the rupee comparison flatters and the rate invites comparison — and the rate cannot be found by division, since the premiums arrive on many dates and it is an XIRR. Surrender rules since 2024 require a special surrender value at least equal to the present value of paid-up benefits, payable after the first policy year, which removes the worst outcome without making exit cheap. Two questions settle any such policy: what is the XIRR, and what would term plus investing the difference have produced?