The most expensive decision an Indian household makes with a financial product is buying protection and investment bundled together, and the reason is that the bundle hides the price of each.
Start from what the two things are. Insurance transfers a risk you cannot afford to carry. Its correct price is small, because the event is unlikely. Investment compounds capital. Its correct price is also small, because the market does the compounding and the product does not. A bundled policy charges you as though both were expensive.
Worked example: endowment against term plus an index fund
Price the bundle. A representative endowment policy takes ₹1,00,000 a year for twenty years, insures ₹20,00,000, and pays at maturity the sum assured plus accrued reversionary bonuses plus a terminal bonus. At a reversionary bonus of ₹45 per ₹1,000 of sum assured per year, the accrued bonus over twenty years is ₹18,00,000; add a ₹4,00,000 terminal bonus and maturity is ₹42,00,000 against ₹20,00,000 of premiums, a multiple of 2.10. The proceeds are exempt from tax where the premium stays inside the statutory proportion of the sum assured, which at 5% here it comfortably does [verify: Section 10(10D) of the income-tax statute and its premium-proportion conditions, incometaxindia.gov.in; these conditions have been amended repeatedly].
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Two point one times your money over twenty years sounds respectable until you annualise it. The internal rate of return on that cash-flow series is 6.6326%.
Now unbundle. Buy the same ₹20,00,000 of cover as a term policy for ₹4,500 a year [verify: any insurer's published rate card for the buyer's age and health; term rates vary widely and change]. Invest the remaining ₹95,500 a year in a direct index fund earning 11.0% gross less a 0.20% expense ratio. Twenty annual contributions at 10.80% reach ₹66,39,532 before tax. The gain is ₹47,29,532, and long-term tax at 12.5% plus cess on the amount above the annual exemption is ₹5,98,589. The route ends at ₹60,40,943 after tax, with the same ₹20,00,000 of death cover in force throughout.
The unbundled route is worth ₹18,40,943 more on the same ₹1,00,000 a year, an internal rate of return of 9.6568% against 6.6326%, a gap of 3.02 percentage points a year.
Then do the thing that separates an analyst from an advocate: find the assumption the conclusion depends on and price it. The comparison assumed an 11.0% gross equity return. Solve for the gross return at which the two routes tie and you get 7.845%. Below that, the endowment wins. So "endowment policies are bad" is the wrong conclusion. The right one is "the endowment is buying you a guaranteed-ish 6.63% and you are giving up whatever equities return above 7.85% for it." That is a real trade and some people should take it. Most people taking it do not know they are taking it, and that is the problem.
What else should you know about these products?
Three further facts belong to any conversation about these products.
The bonus is not guaranteed, and only the sum assured is contractual. Reversionary and terminal bonuses are declared at the insurer's discretion out of the participating fund's surplus, so the 6.63% is an illustration and not a promise. It is often presented as comparable with a government bond yield, and it is not.
The surrender schedule is brutal in the early years. Surrender at year three, having paid ₹3,00,000, and the guaranteed surrender value floor is a stated proportion of premiums paid excluding the first year, which at 30% is ₹60,000. You lose ₹2,40,000, or 80% of everything you paid [verify: the guaranteed and special surrender values are set by the policy document and by the current IRDAI product regulations, irdai.gov.in. The special surrender value regime was revised in 2024 and is materially more generous than the guaranteed floor, so read the policy's own table]. The lapse rate on these products is high, and a high lapse rate against a schedule like that is a transfer from the households who lapse to the ones who persist.
A unit-linked policy is an investment product with an insurance charge and four other charges. The stack, in the order it is deducted: a premium allocation charge taken off the top, a policy administration charge, a mortality charge for the cover, and a fund management charge on the assets. On a ₹2,00,000 annual premium with a 5% allocation charge, ₹6,000 of administration and ₹9,400 of mortality, only ₹1,74,600 reaches the fund in year one, a 12.70% drag before the fund management charge. Add 1.35% on the invested amount and the all-in first-year cost is ₹27,757, or 13.88% of premium [verify: every charge is set by the specific policy's benefit illustration, which the insurer must give you. Read that document and not the brochure]. Charges typically fall in later years. That is why the product is sold on its long-run illustration, and why the surrender schedule exists to stop you leaving before the charges taper.
The rule that survives all of this is to buy protection as protection and investment as investment. A product that will not tell you the price of each separately has already told you what you needed to know.