Components of Life Insurance Premium in an Endowment Plan
In many parts of the world, people actively buy insurance.
However, in India, insurance policies are mostly sold, not chosen.
In fact, nearly 70–80% of life insurance policies sold in India are non-term plans.
These include endowment and whole life policies.
As a result, many buyers do not fully understand how their premium is used.
Therefore, understanding the premium components of an endowment plan is essential before making a decision.
Why Understanding the Premium Breakup Matters
Many insurance policies are mis-sold for a few common reasons.
First, insurers often do not clearly explain the premium breakup.
Second, buyers assume that the entire premium gets invested.
Third, returns are compared incorrectly with mutual funds or other investments.
Because of this, expectations do not match reality.
When you know the premium structure, you can judge whether an endowment plan suits your goal.
Alternatively, you may find that term insurance plus separate investments works better.
Example: Endowment Policy Premium Breakup
Let us understand this with a simple illustrative example.
Policy Details (Illustrative)
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Annual Premium: ₹1,00,000
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Sum Assured: ₹25,00,000
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Policy Term: 15 years
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Age of Policyholder: 35 years
The figures below are approximate and only for explanation.
Premium Components Explained
Out of the annual premium of ₹1,00,000, the amount is divided as follows:
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Mortality (Risk) Premium: ₹10,000
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Agent Commission: ₹25,000
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Operational Expenses: ₹10,000
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Insurer Profit / Margin: ₹5,000
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Investible Surplus (Policyholder Fund): ₹50,000
Calculation
₹1,00,000
– ₹10,000
– ₹25,000
– ₹10,000
– ₹5,000
= ₹50,000
This ₹50,000 is the actual amount invested on behalf of the policyholder.
Explanation of Each Premium Component
1. Mortality Premium (Pure Risk Cost)
This is the cost of providing life cover.
In comparison, a pure term insurance plan offers the same cover at a much lower cost.
Therefore, endowment plans are not cost-efficient for protection alone.
2. Agent Commission and Distribution Cost
Insurers pay this amount to agents, mostly in the early policy years.
As a result, commissions significantly reduce investible surplus.
In fact, this is one of the biggest reasons endowment plans generate low long-term returns.
3. Operational Expenses
These costs include:
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Policy servicing
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Branch operations
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Documentation and compliance
Although these expenses are necessary, they reduce the amount available for investment.
4. Insurer Profit or Business Margin
This portion represents the insurer’s operating profit.
It does not benefit the policyholder directly.
5. Investible Surplus (Policyholder Fund)
Only this part of the premium is invested.
Typically, insurers invest it in:
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Government securities
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Bonds
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Approved debt instruments
Generally:
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Around 90% of investment returns are paid as bonuses
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Returns remain stable but low
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Returns are not market-linked
Key Takeaways for Policy Buyers
Endowment plans combine insurance and savings, but at a high cost.
A large portion of your premium does not get invested.
Therefore, before buying such a policy, always ask for:
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Detailed premium breakup
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Guaranteed vs non-guaranteed benefits
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Expected internal rate of return (IRR)
Most importantly, remember this rule:
Insurance should protect your family first. Investments should grow your wealth.
Disclaimer
This content is for educational purposes only.
It does not constitute insurance advice.
Premium components and returns vary based on insurer, product, age, and policy terms.
Please read all policy documents carefully before purchasing.
