Please Read This Before Buying a LIC Policy!

Last Updated on

Are you considering the purchase of an endowment policy? Perhaps a cash back policy? Perhaps your friendly agent told you about a policy or a “magic plan” that would offer constant pension guaranteed by the government? Please read the following before buying an LIC policy or any insurance policy that has an investment component associated with it.

A request to readers who understand the pros and cons of mixing insurance and investment: Please consider sharing this post with your friends or relatives with the sharing buttons the on the left.

Rule no 1:  There is no such thing as a good product or bad product, just a suitable product or unsuitable product. What is suitable for one, may not be for another.

Rule no 2:  No such things as best return, good return or bad return. Only an adequate return or inadequate return. This is decided by two factors: the real rate of inflation and how much you can invest.

Rule no 3: Products last. Needs first. What is the hurry to choose a product? Can we not spend a few minutes following rules 1 and 2? That is, ask

  • What is my need? An example: How to buy an Audi Car
  • What is its current cost? By how much will it become expensive year after year?
  • How much can I invest?

Let us consider two examples:

Example 1: Retirement 

Ask yourself, what were your monthly expenses towards groceries and essential utilities five years ago or ten years ago. Just consider yourself and your wife here. Enter the expenses in the green cells corresponding to the year given. You can delete any green cell entry which you think is not relevant
The sheet gives the actual rate of inflation in your expenses.

For the sake of argument, let us assume this is about 8%. Suppose you are 30 years old and wish to retire at 55, the expenses for groceries and utilities alone after 25 years would be about 7 times higher [(1+8%)^25 ~7].

So if your current expenses are 30,000 a month, it would be about 2 lakhs per month. This increase is because of the 8% inflation assumed. We assume (incorrectly) that there would no other change in your lifestyle (positive or negative!).

After 25 years, your income would stop, but expenses will not. Assuming you  (and your wife) will live another 20 years, inflation will play a role here too. To understand more check out the Retirement Planning Slide Show

We will assume conservatively (not recommended) that inflation after retirement is 6%.

If you wish to be financially independent after retirement, that is if your pension or income after retirement should increase year after year at 6% to keep pace with inflation, you will need about 4 Crores.

Let us assume about 40% of 4 Cr will come from your other investments (including EPF etc) and 60% has to be generated from LIC magic plan that your agent wants you to invest in.

These are only assumptions for the sake of argument. You can punch in any number you like in low-stress Retirement Calculator (excel sheet) also available online and as an app at Google play.

So your LIC policy has to first generate a corpus of about 2.4 Cr and then you will have to invest such that the pension (after tax) that will grow year after year at the rate of 6%. If you are thinking about buying an annuity policy, it is important to recognise that they cannot accomplish this. Read more about them here: How Annuity Plans Work

Now, guaranteed as it is, an LIC policy (money back, endowment) would fetch you a return of 6-7% and this is a generous estimate.

So at 7% return (assuming the life insurance component is free), your policy premium should be about 29,000 a month. If it grows at 7% a year for 25, it will fetch you the 2.4 Cr required. So the investment required is pretty much equal to the current monthly expenses for groceries and utilities (alone!).

If you can invest this much, go for the LIC policy (this is only an illustration, please calculate with numbers relevant to you using the tools mentioned above).

Else … Why think about that now? Let us be optimistic that you can invest that much.

Example 2: Your Child’s education

If monthly expense can increase at the rate of 8%, education expenses (or marriage expenses) grow at 10%-12% (and this is an underestimate).

Suppose, your child is 1 Y old, with college 16Y away. The current cost of education that you have in mind is say, 10 Lakhs. This is tough to estimate: The trouble with fixing the current cost of a child’s education

At 10% inflation, after 16Y, the cost would be about 46 Lakhs. So with an LIC policy offering you (unrealistic) 7% return, you will need to invest 13,000 a month (assuming insurance component is free).

If you can invest this much, buy the LIC policy (this is only an illustration. Use the Goal Planners to use numbers relevant to you)

Else … Why think about that now? Let us be optimistic that you can invest that much.

If you like this way of determining if a product is suitable or not, do spend some time with the Visual Goal Planner.

Once you are convinced that the LIC policy or any insurance policy with an investment component in it would be suitable for your requirement, go ahead, buy it. Enjoy the peace of mind that comes with it. Good luck.

Do I hear you thinking that you cannot invest that much? No problem: Welcome to

If you wish to understand and implement simple money management ideas quickly, do consider buying my new book with Subra( at (Rs. 359) or  Flipkart(Rs. 359) or Bookadda (Rs. 339). Infibeam(Rs. 307) or 339).

Do share if you found this useful

About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
Want to conduct a sales-free "basics of money management" session in your office?
I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media

Content Policy

Freefincal has original unbiased, conflict-of-interest-free,  topical reports, reviews, commentary and analysis on all aspects of personal finance like mutual funds, stocks, insurance etc. All guest authors and contributors to the site also do not have any conflict of interest. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. No promotional content We do not accept sponsored posts and link exchange requests from content writers and agencies. This is our privacy policy Our website is non-profit in nature. The revenue from the advertisement will only be used for hosting charges, domain registration charges, specific plugins necessary for traffic growth and analytics services for search engine optimisation.

Do check out my books

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingMy first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.  It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You WantGamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantMy second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)

Free Apps for your Android Phone

All calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.


  1. Wonderful way to explain in your rule #1 and #2. I think using words like adequate/ inadequate and suitable/ not suitable takes away the emotion and focuses on the need.
    Only other rule I would have thought is whether the risk level is appropriate on not.

  2. I am shocked to read that even you …pattuji…whom I respect…..are afraid of naming private insurance companies…not sure why…pls don’t allow us to doubt your integrity…why did you use LIC in title?? Such policies are sold ecen by ICICI hdfc etc…your article is about endowment and money back plans….not about LIC as title suggests…

    For most of experts LIC is favourite whipping boy…not sure why…though all insurers provide similar pilucies

  3. Lic is like a brand…
    In Feb march, people say we have to buy lic. Just lic, not even lic policy..

    It’s like getting something Xeroxed and not photocopied.

    So to have more impact on people, such title could be useful. CAuse for people, private company policy may be different from lic.

    They prefer lic over private companies. Which is offcourse correct.

Leave a Reply

Your email address will not be published. Required fields are marked *