Last Updated on October 8, 2023 at 5:17 pm
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.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
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 freefincal.com.
If you wish to understand and implement simple money management ideas quickly, do consider buying my new book with Subra(money.com) at Amazon.in (Rs. 359) or Flipkart(Rs. 359) or Bookadda (Rs. 339). Infibeam(Rs. 307) or Sapnaonline.com(Rs. 339).
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter with the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr. M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & it's content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)