Why Single-Premium Endowment Plans Are Poor Wealth-Building Tools

A single-premium endowment plan is a life insurance policy where you pay the entire premium upfront in one lump sum and stay invested for a fixed term, typically five to 15 years.

How It Works 

The premium is split into three broad parts: life cover (sum assured), policy costs and charges, and a savings component, which earns returns. “Returns come from guaranteed benefits, if any (such as guaranteed additions or maturity amounts) and non-guaranteed bonuses, depending on the insurer’s performance (in participating plans),” says Narendra Bharindwal, president, Insurance Brokers Association of India (IBAI).

At maturity, the policyholder receives the sum assured and accrued bonuses or guaranteed additions, if applicable.

In practical terms, the effective annual return usually falls in the range of four to six per cent, depending on the plan structure, term, and insurer performance. These are stable but not market-beating returns.

Who It Is Suited For 

Single-premium endowment plans are best suited for conservative investors who value capital protection over high returns, individuals with one-time surplus funds (retirement corpus, inheritance, asset sale), investors seeking forced savings with insurance wrapped in, and people uncomfortable with market volatility.

“They make sense when the goal is capital safety and modest growth, the investor prefers simplicity over active portfolio management, and the money is not required in the short term,” says Bharindwal.

Maturity proceeds are tax-free under Section 10(10D) only if the sum assured is at least 10 times the premium. If this condition is not met, maturity proceeds can become taxable.

Why Single Premium Endowment Plans Are Not A Good Investment 

However, for pure financial efficiency, a term insurance plus mutual fund or debt investment strategy typically delivers much higher life cover for the same cost, better long-term returns, and greater flexibility and liquidity. Hence, single-premium endowment plans should be viewed as low-risk savings instruments with insurance, not as wealth-creation tools.

A key trade-off consumers should be aware of is liquidity constraints. Most plans have a lock-in of two to three years. Surrendering early can lead to significant capital loss. Even after lock-in, surrender values are often lower than the amount invested. Also, projected returns shown at sale are illustrative, not guaranteed. Further, bonuses depend on insurer performance and may vary significantly.

The money remains locked at lower returns while alternative options may grow faster. Hence, it is not ideal for long-term goals like retirement, where inflation protection is critical. “Single-premium endowment plans are not bad products, but they are often misunderstood. They work best as safe, disciplined savings tools for conservative investors with surplus funds, not as high-return investments,” says Bharindwal.

Consumers should buy them only after clearly understanding returns, lock-ins, and tax rules, and never as a replacement for adequate term insurance or long-term market-linked investments.