Don’t buy insurance policies for investment
Many investors are buying policies of LIC and other private companies for investment purpose. There are many policies in the name of children and retirement. These policies are not good from the investment angle. It is better to avoid such schemes because of the poor returns and the low insurance cover it offers.
How to analyze the returns in an insurance Policy?
In the case of LIC, the annual premium for a 30 year old person for a 30 year policy for 10 lakhs comes to Rs. 30,075. He will be paying 9.02 lakhs in the 30 year period. The service tax will be extra. Now let us see what he will get after 30 years?
After 30 years, he will get the sum assured of 10 lakhs and bonus for 30 years. If we assume the current rate of bonus (Rs 48 per lakh per year) is continued for the next 30 years, he will get around 14.40 lakhs as bonus. So, he will get 24.40 lakhs as the maturity amount. There can be a final additional bonus also, depending on the experience of the company.
His nominee will get 10 lakhs plus bonus, in case of his death during this 30 year term.
The CAGR in this policy works out to be around 6%. Even PPF offers more than 8.7% returns now. Some of the banks are offering 6% on their savings bank account. The policy offers risk cover of 10 Lakhs, which is extra. But you can purchase an online term plan at a very less cost. Another risk is that there is no guarantee regarding this bonus rates for the next 30 years.
Then what is the better option?
Can he do a better investment using this 30,075 and get better returns? He can purchase a term policy of 10 lakhs at a cost of around 1000/- per year and invest the balance of 29,075 every year for 30 yrs.
1. If he is risk averse
He may invest the amount in PPF. If the interest rate is averaged out at 8% in PPF, he will get around 33 Lakhs after 30 years.
PPF is a 15 year government scheme with the flexibility to pay any amount between 500 – 1.5 Lac in a year. You can extend it in blocks of 5 years. In case of death anytime, your family will get 10 lakhs from the Term assurance and the accumulation in PPF account. In both the cases, it is better than the insurance policy.
2. If he is aggressive
He can invest this amount of 29075 every year in a good mutual fund. Assuming a return of 12%, he will get around 70 Lakhs. Good mutual funds have given return of 20% in the last 20 years.
In case of his death anytime during the 30 years, his family will get 10 Lacs from term insurance and the accumulated value in mutual funds. In both the cases, his family gets more.
So it is clear that, it is better to avoid insurance policies for investment purpose. Go for a Term Insurance and invest the balance in good investments for better returns.
So, what are you planning for in the new year?
Insurance policies are not good investment option. Bonus rates are declining for LIC. Most of the private companies are declaring low bonus compared to the current LIC rates.
Disclaimer: The exact premium figures in the article can differ. The article is an attempt to explain why insurance policies are not good as an investment option. All the views on this article are personal, some people may disagree with it which is totally acceptable.
Melvin Joseph
SEBI registered Investment Adviser
Certified Financial Planner
SEBI Registration Number – INA000000342
Finvin Financial Planners
10, Olive Excel CHS, Plot No – 16, Sector- 42
Sea woods, Nerul – 400706
Mobile: 9820843739
Website: http://www.finvin.in
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