Pull out your last endowment policy statement. Find your annual premium. Multiply by your remaining policy term.
For most ₹15L+ earners with a "good" LIC endowment policy from their dad or relationship manager, that number lands somewhere between ₹12 lakh and ₹40 lakh of premiums over 20–25 years.
Now ask the only question that matters: what is the IRR?
If you have never calculated your endowment policy returns, you are not alone. Most policyholders haven't. And LIC, your bank, and your relationship manager have no commercial reason to show you. The number sits between 4% and 6% — before inflation.
Indian CPI has averaged ~6% for the last two decades (MoSPI series). Your "guaranteed" policy is a real-return-negative product wrapped in marketing about discipline and safety.
This post shows you the math.
The real problem isn't the policy. It's the bundling.
Endowment policies bundle two unrelated products: life insurance and a savings vehicle.
You don't bundle these for the same reason you don't buy a fridge that's also a treadmill. The optimal version of one is mutually exclusive with the optimal version of the other.
The compromise is severe: the cover is too low, and the savings return is below inflation.
Most ₹15L+ earners walk around with ₹10–30 lakh of endowment "cover" thinking they are insured. They are not. A 35-year-old with two kids and an SDM-grade salary needs ₹1–2 crore of pure protection. The endowment piece of that is decorative.
How LIC's bonus actually works (and why it doesn't compound)
Endowment maturity = Sum Assured + (Annual Bonus × Years) + Final Additional Bonus.
The critical word in that formula is simple. Reversionary bonus on Indian endowment policies accumulates linearly, not compoundly.
Take a ₹10 lakh sum assured. LIC's bonus rate on its main endowment plan has hovered around ₹40–46 per ₹1,000 SA in recent years (Plan 914 bonus history).
Year 1 bonus: ₹42 × 1,000 = ₹42,000. Year 2 bonus: ₹42,000 again. Not ₹42,000 × 1.05.
That ₹42,000 sits frozen for 25 years. By the time you collect it at maturity, inflation has eaten roughly half its real value.
Compare that to compounding. ₹42,000 invested at 11% — the 25-year Nifty 50 TRI long-run CAGR — becomes ~₹5.6 lakh in 25 years. At 8%, a conservative debt-equity blend, it becomes ~₹2.9 lakh.
The bonus structure is not a bug. It is the actuarial design that lets LIC pay it.
Endowment policy returns: the 25-year IRR your statement won't show
Run the numbers on a real-shaped policy.
Sample case (illustrative):
- Age at start: 30
- Sum Assured: ₹15 lakh
- Annual premium: ₹52,000
- Term: 25 years
- Bonus rate (assumed steady): ₹44/1,000 SA
- Final Additional Bonus: ₹150/1,000 SA at maturity
Total premiums paid: ₹13 lakh.
Maturity value: ₹15L (SA) + ₹16.5L (vested simple bonuses) + ₹2.25L (FAB) = ~₹33.75 lakh.
Sounds nice. Until you compute the IRR.
Plug those cashflows into any spreadsheet's IRR() function — premiums as negative values, maturity as a positive — and the answer is ~4.4% per annum.
Inflation over the same horizon: ~6%. Your "savings" lost purchasing power every single year you held them.
A bank FD over the same period averaged 6.5–7.5%. A boring PPF returned 7.5–8.7%, fully tax-free. A Nifty 50 index fund returned ~11% with full liquidity after Year 1.
The endowment underperformed every safer or more liquid alternative.
"Buy term, invest the rest" — the math
Same 30-year-old. ₹1 crore term cover from any IRDAI-approved insurer: ~₹10,000/year for a non-smoker.
That frees up ₹42,000/year (₹52,000 endowment premium minus ₹10,000 term).
Invest ₹42,000/year for 25 years at 11% (Nifty 50 TRI long-term): Future value ≈ ₹56 lakh.
Plus you carried ₹1 crore of cover the entire time — vs ₹15 lakh on the endowment.
Even at a conservative 9% (60:40 equity-debt), you finish with ~₹40 lakh — still more than the endowment maturity, and with 6.6× the protection.
The wealth gap on this single mid-sized policy: ₹22–35 lakh, before counting the underinsurance risk you carried for 25 years.
Multiply that across the two or three endowment policies most ₹15L+ earners hold. The personal cost runs into ₹40–80 lakh.
When endowment actually makes sense (the narrow case)
Three situations:
- You have zero savings discipline and cannot be trusted with a SIP. Genuinely rare among people earning ₹15L+.
- You need a Section 80C parking instrument and have already maxed every better one — PPF, ELSS, EPF, NPS Tier-1, home loan principal. Rarer still.
- The policy already has 15+ years of premiums paid and the surrender penalty exceeds the IRR uplift from switching. This one is a legitimate trap — calculate before exiting.
If you are not in one of those three buckets, the policy is hurting you.
Five mistakes that turn a bad product into a worse outcome
1. Confusing "guaranteed" with "good." A guaranteed return below inflation is a guaranteed loss in real terms. Cost: ~₹15–25 lakh over 25 years on a single ₹50K/year policy.
2. Surrendering at the wrong time. Guaranteed Surrender Value is 30% of paid premiums (excluding year 1) for the early years. Special Surrender Value is usually higher. Most people exit on GSV without checking SSV. Cost: 10–25% of corpus.
3. Replacing without overlap. Surrendering an old policy and then applying for term cover. If the term application is rejected for a health reason, you are now uninsured. Cost: catastrophic if it materialises.
4. Treating the policy as an investment. It isn't. It's a bond-equivalent return with an insurance rider. Compare it to debt funds, not to equity. Cost: misallocated mental capital.
5. Letting a relationship manager renew without disclosure. Year-1 commission on endowment is materially higher than on a term plan (IRDAI commission structure). Your "advisor" earns far more selling you the wrong product. Cost: a lifetime of similar recommendations.
Real numbers: Ramesh, 35, Bangalore
Ramesh is a senior software engineer earning ₹38 lakh CTC. He has two endowment policies his father set up:
- LIC New Endowment Plan, ₹20L SA, ₹68,000/year, 12 years remaining.
- Jeevan Anand, ₹15L SA, ₹52,000/year, 18 years remaining.
Combined annual outflow: ₹1.2 lakh. Combined effective cover: ₹35 lakh.
Ramesh has a ₹1.4 crore home loan, two kids under 10, and a wife on a career break. His actual insurance need: ~₹2.5 crore.
His current setup leaves him underinsured by ₹2.15 crore while paying ₹1.2L/year for sub-5% returns.
Restructured:
- ₹18,000/year buys ₹2 crore of pure term cover
- ₹1,02,000/year freed up for investment
- At 10% blended (a 70:30 equity-debt mix): ~₹38 lakh in 12 years and ~₹93 lakh in 18 years
The hard part isn't the math. It's the conversation with his father.
What to do (without me giving you advice)
Three steps that don't require any specific product recommendation:
Calculate the IRR on every traditional life insurance policy you hold. Use a spreadsheet's
IRR()— premiums as negative cashflows, maturity as positive. If the number is below 6%, you are losing real money.Separate the two questions. "How much insurance do I need?" is independent of "where should I save?" Solve each one with the cleanest, cheapest instrument.
Don't surrender first. Get covered first. New term policy issued and accepted → then decide on the old endowment. Never the reverse.
What you don't do at this stage: ask a relationship manager whose income depends on you keeping the policy.
The IRR exercise alone is usually enough. Once you see your own endowment policy returns next to the Nifty 50 TRI long-run number, the decision argues itself. The harder work is the family conversation — most of these policies were bought as gestures of care, not as financial products. Treating the financial mistake as a relational one is what gets people stuck for another decade.
If you have multiple policies, sequence the review: highest-IRR-drag first, longest-remaining-term first. Don't try to unwind everything in a single weekend. Get one term plan issued, build the IRR comparison spreadsheet for each policy, then act on the worst offender.
FAQ
What is the actual return on an LIC endowment policy? 4–6% IRR for most plans, calculated on net cashflows from premium to maturity. The simple (non-compounding) bonus structure is the main reason endowment policy returns lag every other instrument over a 20+ year horizon, including a vanilla bank FD.
Should I surrender my endowment policy? Depends on years paid, current paid-up value, and whether you can pass underwriting for a fresh term policy. Get the SSV quote, compare to expected returns from redeploying — but only after a new term policy is issued.
Is endowment policy a good investment in India? No. It is a bond-equivalent return with insurance bundled in. Both the insurance and the investment are weaker than what you'd get buying them separately.
How much will I get if I surrender my LIC policy after 5 years? GSV = 30% × (premiums paid – year 1 premium). SSV may be higher depending on bonuses. After 5 years on a ₹50K premium, expect ₹60K–1.1L back from a ₹2L outflow.
Term insurance + mutual fund vs endowment — which is better? Term + index fund delivers 3–5× higher maturity wealth over 25 years with 5–10× higher death cover. The trade-off: you have to keep the SIP running. Most who can earn ₹15L+ can.
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This post is published by MyFinancial for educational purposes only and does not constitute investment, tax, or insurance advice. SEBI RIA registration in progress. All numbers are illustrative. Consult a SEBI-registered advisor before making financial decisions.