Why most LIC endowment policies quietly underperform — and when they don't
An honest look at the math behind India's most-sold savings product. The headline IRR is usually 4–6%, but the picture changes once you separate insurance from investment.
There is a number that nobody who sells you an LIC endowment policy will write on the brochure: the internal rate of return. Not the maturity amount — the actual annualised return on the cash you handed over. For most participating endowment plans sold in India today, that number lives somewhere between 4% and 6% before tax adjustments. For policies issued in the last decade to people in their thirties, it is often closer to 5%.
That is not a scandal. It is the consequence of a product that bundles life cover, a savings vehicle, and a distribution commission into a single premium. Once you decompose the premium back into those parts, the math becomes legible — and the genuine use cases for endowment become clearer.
The decomposition
A ₹100 annual premium on a typical 21-year endowment looks roughly like this in the first year:
| Component | Approximate share |
|---|---|
| Mortality charge (life cover) | ~5–10% |
| Agent commission (year 1) | ~25–35% |
| Operating expenses | ~5–10% |
| Investment pool | ~50–60% |
Commissions taper sharply from year 2 onwards (typically 5–7% of premium), so by year five most of your premium is genuinely invested. But that first-year drag is permanent — it never compounds, because it never entered the pool.
The investment pool itself is then deployed mostly in government securities and high-grade corporate bonds, with a small equity allocation. The declared bonus rates that your agent quoted (“₹47 per ₹1,000 SA simple reversionary”) are paid out of the investment income on this conservative portfolio, not on your premium. That is the source of the gap between the quoted bonus rate and your effective IRR.
Where the 5% comes from
Take a 35-year-old buying ₹10 L SA Jeevan Labh (Plan 736) with a 21-year term and 16-year premium-paying period. The annual premium is roughly ₹50,400. Assuming a simple reversionary bonus of ₹47/₹1,000 and a final additional bonus of ₹200/₹1,000 (broadly in line with FY 2024-25 declarations — see our bonus history dataset), the maturity value works out to:
SA = 10,00,000
Simple reversionary bonus = 21 × 47 × 1,000 = 9,87,000
Final additional bonus = 200 × 1,000 = 2,00,000
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Maturity = 21,87,000Total premiums paid: ₹50,400 × 16 = ₹8,06,400. Maturity in year 21 = ₹21,87,000. Plug those into an IRR solver and you land at roughly 5.4% per year, tax-free under §10(10D) provided the 10× SA rule is met.
Compare that with the obvious alternative: buy term cover, invest the difference. A 35-year-old can get ₹50 L pure-term cover for around ₹6,000/year. Direct that ₹50,400 ÷ year as ₹6,000 to term + ₹44,400 to a hybrid mutual fund earning 9% pre-tax (~7.5% post-tax LTCG). After 16 years of contributions and 5 more years of pure compounding, the corpus is roughly ₹26 L, and you’ve had ₹50 L of cover the whole time instead of ₹10 L. The endowment’s tax-free wrapper does not close that gap.
When endowment actually wins
The “buy term, invest the difference” math collapses if you wouldn’t actually invest the difference. That is not a hypothetical — it’s the median behaviour. Endowment functions as a commitment device: the premium notice is non-negotiable, the surrender penalty is steep, and the lock-in runs for 16+ years. For someone who would otherwise spend the ₹44,400, a guaranteed 5.4% tax-free is materially better than a theoretical 7.5% that never gets contributed.
It also wins in three narrower cases:
- You are uninsurable for term. Pre-existing conditions can push term premiums to multiples of healthy-life rates, or get the application declined outright. Endowment underwriting is much looser, so the bundled cover may be your only practical option.
- You need a forced-savings vehicle for a specific milestone. If the maturity date aligns with a child’s higher-education year or a retirement date, the bond-like predictability is a feature, not a bug.
- You’re in the highest tax bracket and have exhausted §80C and ELSS capacity. The §10(10D) tax-free maturity is genuinely valuable when the marginal alternative is a taxable debt instrument.
What to actually do
Before signing anything, run the projection both ways:
- Use our Jeevan Labh calculator (or the generic policy-value calculator for any other endowment plan) to see the realistic maturity range, not just the agent’s “guaranteed + assumed bonus” sales pitch.
- Get a term-insurance quote for the same sum assured at your age and health profile.
- Plug the difference into our SIP calculator at a conservative 8–9% return, post-tax.
If the term + SIP path beats the endowment by more than ~30% on the same horizon, the endowment is bought for non-financial reasons (forced savings, under writing, family pressure). That’s a legitimate purchase — it just shouldn’t be sold as an investment.