The Insurance Trap: Term vs Endowment (The 5% Lie)

The Trap Set by "Uncle"

We all know him. The friendly LIC uncle who visits with a box of sweets. He says: "Beta, money back milna chahiye na? Term insurance is dead money. Take this Endowment plan. You pay ₹50k, you get ₹20 Lakhs after 20 years. Plus Bonus!"

It sounds logical. Indians hate "wasting" money on premiums if they don't die. But logic without math is a trap.

The Math of the Trap

Let's decode standard Endowment Policy.

• •Premium: ₹50,000 / year.
• •Cover (Sum Assured): ₹10 Lakhs. (If you die, family gets this).
• •Maturity (20 years): ₹18 Lakhs (approx).
• •IRR (Return): 5.1%

Inflation in India is 6-7%. By locking money at 5%, you are literally burning purchasing power year after year.

Chapter 1: The Solution (BTID)

BTID = Buy Term, Invest Difference. Let's spend the same ₹50,000 but split it smart.

Step A: Buy Term Insurance

• •Premium: ₹12,000 / year.
• •Cover: ₹1 Crore. (10x higher protection).
• •Note: Term insurance pays ONLY if you die. No maturity benefit.

Step B: Invest the Rest

• •Saving: ₹50,000 - ₹12,000 = ₹38,000.
• •Investment: Put ₹38,000/year (₹3,166/month) in a Nifty 50 Index Fund.
• •Return: Assume conservative 12%.

The Showdown (After 20 Years)

Winner: BTID Strategy.

• •If you die: Family gets ₹1 Crore (vs ₹10L).
• •If you live: You have ₹31 Lakhs (vs ₹18L).

Chapter 2: Why do agents sell Endowment?

• •Commission on Term Plan: ~5% of ₹12,000 = ₹600.
• •Commission on Endowment: ~30% of ₹50,000 = ₹15,000.

Do the math. The agent is feeding his family, not yours.

Chapter 3: "But I already bought it!"

If you are trapped in an Endowment plan:

1. •Surrender? Check surrender value. Often you lose 50% premiums if stopped early.
2. •Make Paid Up: Stop paying premiums. The policy continues with reduced cover. The money stays invested till maturity.
3. •Use Loan: Take a cheap loan against the policy if needed.

Rule of Thumb: If the policy is < 3 years old, surrender it. The loss is "Tuition Fee" for learning finance. If > 10 years, make it Paid Up.

Conclusion

Insurance is for Protection. Investment is for Growth. Mixing them is like using a Shampoo + Conditioner + Toothpaste in one. It cleans nothing and tastes terrible. Buy Term. Invest the Rest.