Endowment plan

An endowment plan is a traditional life policy that combines insurance with a savings element, paying out at the end of the term if you survive. It is sold as protection plus savings, but the cover is usually small and the return is low once you work out the yearly rate.

How it works

You pay a regular premium for a set term. If you die during the term, your family gets the sum assured; if you survive to the end, you get a maturity amount, often with bonuses the insurer adds along the way. So unlike term insurance, you always get something back, which is why endowment premiums are far higher for the same cover.

The catch in the returns

The comfort of “money back” has a cost. Because part of every premium goes to savings and the insurer’s guarantees are cautious, the effective return usually works out to a modest few percent a year, often below what simple long-term investing delivers, and below inflation in some cases. The life cover is also typically small relative to the premium, so it protects your family less than a cheap term plan would.

When it fits, and the alternative

An endowment can suit someone who wants a disciplined, very low-risk savings habit bundled with some cover, and who values certainty over returns. For most people, though, buying term insurance for protection and investing the difference separately does both jobs better. See the numbers in term vs endowment, the real cost.