I combined investment and insurance and paid the price

Last Updated on November 22, 2023 at 11:33 am

In this edition of the reader story, we have an account of a reader making the classic mistake of combining investment and insurance, the price he had to pay. The reader wishes anonymity.

About this series: I am grateful to readers for sharing intimate details about their financial lives for the benefit of readers. Some of the previous editions are linked at the bottom of this article. You can also access the full reader story archive.

Opinions published in reader stories need not represent the views of freefincal or its editors. We must appreciate multiple solutions to the money management puzzle and empathise with diverse views. Articles are typically not checked for grammar unless necessary to convey the right meaning and preserve the tone and emotions of the writers.

If you would like to contribute to the DIY community in this manner, send your audits to freefincal AT Gmail dot com. They can be published anonymously if you so desire.

Please note: We welcome such articles from young earners who have just started investing. See, for example, this piece by a 29-year-old: How I track financial goals without worrying about returns. We have also started a new “mutual fund success stories” series. This is the first edition: How mutual funds helped me reach financial independence. Now, over to the reader.

We have all received the advice – “Do not combine insurance and investment”. Typically, we are sold an endowment or ULIP policy before we gain proper knowledge on investment avenues such as mutual funds or equity. Even when we have some idea that we should not mix insurance with investment, we fall prey to sales talks from RMs or Insurance agents. Here is a real-life example of a mistake I made and my learnings from this mistake being invested in over 20+ years.

Policy details

• Policy Name LIC New Jeevan Shree (Plan 151)
• Policy Start Date Oct 2002 for 25 Years policy with 12 years premium payment
• Key Features: Guaranteed Rs 70 for every thousand Sum Assured for each year of Policy.
• Loyalty Bonus: declared at the end of the policy
• Actual: Sum Assured – 35,00,000
• Guaranteed Addition = 61,25,000 (3500 * 70 * 25)
• Loyalty Addition – 4,00,000 to 12,00,000 (Only known at the end of the policy)
• Yearly Premium Rs. 2,60,316 for 12 Years. Total: 31,23,792
• Maturity: Oct – 2027
• Current Value: Approx 50,00,000 (If the policy is closed today).

While it looks fantastic with the guaranteed addition, the major attraction to take the policy was the 1 crore maturity value. Back in 2002, it was a great target, but that is what innumeracy and our lack of imagination for future growth can do to us.
Even today, I can see agents referring to Jeevan Shree and New Jeevan Shree (popular LIC policies with relatively higher returns), which no longer exist to justify the greatness of endowment policies.

Around the 9th year, I realised the mistake, but it was too late for a course correction. Between years 10 and 12, I thought long and hard to decide whether to continue to pay the premium or make it paid up. However, the damage was already done, so I paid the premium fully to keep the policy in force.

Let’s consider an imaginary situation of not mixing insurance and investment. Suppose the premium for 35 lakh term cover in 2002 for a 26-year-old was about Rs. 5,500.

So 5500 * 25 = 137500 needs to be set aside for the yearly premium of term insurance to match the insurance coverage of the above policy.

That leaves 31,23,792 – 1,37,500 = 29,86,292 for 12 years for Investment. Let’s assume we invest this amount in mutual funds for 12 years as we paid the yearly premium of this policy.

That is approx. = 2,48,858 per year for 12 years or 20,738 per month for 12 years. Let’s round to 2,48,000 yearly and 20,500 monthly for easy calculations. I took 2 different funds available in 2002 and did a simulation as a yearly SIP and monthly SIP for 12 years.  Here are the results (as of 19th Nov 2023) from a dummy portfolio from ValueResearch online.

• LIC: Rs. 50,00,000
• HDFC Flexi – YearlySIP: Rs. 4,87,03,496. XIRR: 18.3%
• HDFC Top100 YearlySIP: Rs. 4,12,29,543. XIRR: 17.2%
• HDFC Flexi – MonthlySIP: Rs. 4,16,25,186. XIRR: 17.8%
• HDFC Top100 Monthly SIP: Rs. 3,50,415,08. XIRR: 16.6%

Both funds have changed character over these years and are considered regular plans to keep things simple. I have chosen these funds for analysis as these were my first set of mutual funds when I started investing.

Editor’s note: Such a backtest with specific funds has built-in biases and assumptions, some of which may not be practical. Nonetheless, the message the reader wishes to convey is unchanged and clear.

It is obvious mutual funds are a clear winner by miles, which is why they say do not combine insurance and investment.

With an assumption of 4,00,000 loyalty addition, XIRR as of maturity date is 6.05.  While it is impossible to predict the market, we will have to wait and see the mutual fund returns on maturity.

Let’s see some Pros and Cons of this Policy.

• Discipline: The only advantage I see is the discipline it brings into paying the yearly premium for a careless investor.
• Lock In: Money invested is truly locked in until you get the amount at maturity. In Mutual funds, we might sell, withdraw partially, switch funds, etc. Even then, a disciplined investor should do well in mutual funds.
• Taxation: The above policy is tax-exempt as it was taken in 2002. However, even with LTCG, a mutual fund does just fine due to the higher returns
• Low Returns: Returns are low and do not beat inflation. While large future value looks attractive in the prospect document, in the real world, it is useless. Neither Insurance is adequate nor the returns.
• Liquidity: We can liquidate or withdraw partially from the mutual funds if there is a short-term need. Partial withdrawal could be a terrible step in an endowment policy, and the process is cumbersome.

The lessons will remain the same even if you divide all numbers by 10 (. Do not mix insurance with Investments.

In Summary, I learned the hard way that we should not combine Insurance and investment. Taking adequate Term and health coverage and investing enough for goals will be a better approach for anyone. Happy Investing.

Reader stories published earlier:

As regular readers may know, we publish a personal financial audit each December – this is the 2022 edition: Portfolio Audit 2022: The Annual Review of My Goal-based Investments. We asked regular readers to share how they review their investments and track financial goals.

• First audit: How Suhas tracks his MF investments and reviews financial goals.
  • Update 1: Why I hiked my retirement corpus target though my networth doubled since Dec 2019.
  • Update 2: After ten years of MF investing, Suhas is on track to achieve his financial goals
• Second audit:  How Avadhoot Joshi evaluates his investment portfolio.
  • Update: Why I redeemed from EPF to invest in Equity MFs.
• Third audit: How a single mom is on track to financial freedom
• Fourth audit: How Gowtham started goal-based investing & took control of his money
• Fifth audit: Why my financial independence & early retirement plans were postponed by four years
• Sixth audit:  How Abhisek funded his marriage & is on track to financial freedom.
• Seventh audit: How Rohit’s early struggles defined his investment journey
  • Update: I feel confident about my retirement planning after five years of MF investing.
• Eighth audit: Why my investments are still on track despite job loss and lower income.
• Ninth audit: How a retirement planning calculation scared me to take action
• Tenth audit: I made several investment mistakes but have turned my life around.
• Eleventh audit: My net worth doubled in the last financial year, thanks to patient investing!
  • Update: How I achieved investing nirvana.
• Twelveth audit: My financial journey: from novice to goal-based investor.
• Thirteenth audit: My journey: from a negative net worth to goal-based investing.
• Fourteenth audit: From Fixed Deposits to Goal-based investing in MFs.
• Fifteenth audit: My 10-year financial journey – mistakes made and lessons learnt.
• Sixteenth audit (part 1): How I achieved financial independence without mutual funds or stocks.
• Sixteenth audit (part 2): Lessons from my financial independence journey and future investment plans.
• Seventeenth audit: How I plan to achieve financial independence and move to my native place
• Eighteenth audit: I used the current bull run to reduce my mutual funds from 14 to 4!
• Nineteenth audit: How a conservative investor created his financial plan
• Twentieth audit: I plan to achieve financial independence by 46; this is my master plan
• Twenty-first audit:  I have made many investment mistakes but am on course to financial independence by 45.
• Twenty-second audit: I felt worthless six years ago but have achieved financial stability today
• Twenty-third audit: My financial journey was directionless until age 40: this is how I made up for lost time
• Twenty-fourth audit: Why I increased equity MF investments by 275% and reduced PPF contributions.
• Twenty-fifth audit: How I track financial goals without worrying about returns
• Twenty-sixth audit: I am 24 and started investing 1Y ago, but what am I investing for?
• Twenty-seventh audit: How we plan to achieve a retirement corpus 50 times our annual expenses.
• Twenty-eighth audit: I thought equity investing was a gamble, but now I aim to hold 60% equity for retirement
• Twenty-ninth audit: My journey: From 5 lakhs in debt to building a corpus worth six years in retirement
• Thirtieth audit: My investment journey: From random purchases to a goal-based portfolio
• Thirty-first audit: My investment journey: from product-driven to process-driven
• Thirty-second audit: How a young couple is trying to balance travelling and investing
  • How to achieve your travel goals without breaking the bank!
  • How a young couple tries to balance their personal and financial aspirations
• Thirty-third audit: My journey: From Rs. 30 bank balance to financial independence
• Thirty-fourth audit: Our journey: From scratch to a net worth of 18 times annual expenses.
• Thirty-fifth audit: From a net worth of Rs. 6000 to auto-pilot goal-based investing
  • Follow-up: How I manage my goal-based investments in auto-pilot
• Thirty-sixth audit: How I retired from corporate bondage at 46, two years ago!
• Thirty-seventh audit: How I learnt to keep it simple and build a net worth 19 times my annual expenses
• Thirty-eighth audit:  How Abhineeth plans to achieve financial independence and build a house.
• Thirty-ninth audit: How Sahil plans to achieve financial independence by efficient tracking
• Fortieth audit: My Journey to a Ten Crore Portfolio
• Forty-first audit: Burdened with debt for several years, I am now aggressively investing in equity
• Forty-second audit: From Engineer to Librarian after Financial Independence and Early Retirement (FIRE)
• Forty-third audit: I lost six months’ income in F&O and ditched it for systematic investing
• Forty-fourth audit: My retirement plan to handle the harsh realities of the IT industry
• Forty-fifth audit: My investment journey: mistakes, 10 years of MF investing and recovery
• Forty-sixth audit: My MF portfolio is worth six crores despite multiple mistakes

These published audits have had a compounding effect on readers. If you would like to contribute to the DIY community in this manner, send your audits to freefincal AT Gmail. They could be published anonymously if you so desire.