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Three insurance products dominate the Indian market. Term insurance. ULIP. Endowment plans. They get sold as variations of the same product. They’re not. One of them is genuinely useful for most people. The other two are mostly there to enrich the agent.
What each product actually is
Term insurance is pure life insurance. You pay a premium. If you die during the policy term, your family gets a large sum. If you survive, you get nothing. It’s insurance in the original sense of the word.
ULIP is Unit Linked Insurance Plan. It combines life insurance with investment in mutual fund-like options. Part of your premium goes to insurance. Part goes to investments. You pay charges for both layers.
Endowment plan is also a hybrid. Insurance plus a savings or investment component, structured as guaranteed returns or with-profits. The investment side is typically very conservative, like a fixed-deposit-with-extras product.
The hidden cost in ULIPs and endowments
ULIP charges include premium allocation charges, policy administration charges, fund management charges, mortality charges, and surrender charges. They’re disclosed but buried in fine print. Total costs in the first few years can eat 20 to 40% of your premium. The investment compounding starts only after the costs come out.
Endowment plans look like they have no charges. The ‘cost’ is invisible because the returns are simply low. Effective IRR on most endowment plans is 4 to 6%, sometimes lower. Inflation in India is around 4 to 5%. So real returns are near zero.
Term insurance has minimal cost. The full premium goes toward the insurance. There’s no investment component, so no investment fees.
Why term plus mutual funds wins
Take a 30-year-old, non-smoker, healthy. ₹1 crore term cover for 30 years costs around ₹12,000 to ₹15,000 a year.
If they were sold a ULIP for the same coverage, the annual premium would be around ₹1.5 lakh, of which around ₹15,000 covers the insurance and the rest is invested with high charges.
If they took the term plan and invested the difference (₹1.35 lakh per year) in equity mutual funds at 12%, after 30 years they’d have around ₹3.65 crore plus the ₹1 crore insurance during the term.
If they took the ULIP at 8% effective post-cost return, they’d have around ₹1.7 crore plus the same coverage.
Difference: about ₹1.95 crore. Just from un-bundling.
The bonus illusion explained
Endowment plans get sold with phrases like ‘guaranteed bonus’ and ‘loyalty addition.’ These sound impressive. They’re calculated on the sum assured, not on premiums paid, which makes them look like a percentage of a big number. The actual return is what matters, and it’s usually 4 to 6%.
How to fix existing ULIPs without losing more
If you’re early in a ULIP (first 1 to 3 years), exiting often forfeits a chunk through surrender charges. The math sometimes still favors exiting, especially in the first year. Run the numbers with a fee-only advisor.
If you’re past 5 years, surrender charges are usually low or zero. You can exit, take the proceeds, buy term insurance separately, and invest the rest in mutual funds. The before-and-after comparison usually shows the second approach winning.
For policies with very long lock-ins or surrender penalties, it’s sometimes better to make the policy paid-up (stop premium payments without surrendering) and let the existing investment grow at its slow pace, while you build a real plan elsewhere.
The honest verdict.
Buy term insurance for life cover. Stop combining insurance and investment. Buy mutual funds for investment. Use ELSS, PPF, NPS for tax-saving needs. Buy health insurance separately for medical cover.
The ULIP and endowment industry exists because agents earn high commissions on these products. That’s why they get sold. It’s almost never why they should be bought.
The clean separation of insurance and investment is one of the most underrated wealth-building decisions a HENRY can make.
