Last Updated on October 17, 2017
A discussion on why one should not mix insurance and investment and buy pension plans, endowment plans, moneyback policies or even ULIPs. As far as regular freefincal readers are concerned this post is preaching to the choir. Most of you guys know and understand why insurance and investment should not be mixed.
Annoucement: My second book, Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you want, co-authored with Pranav Surya is now available at an attractive discount. You can now get or gift the paperback for Rs. 129 (usual price Rs. 199) and the Kindle for Rs. 29.70 (yes!) or you can read it as part of Kindle Unlimited. Grab it now before the offer closes! Remember that you do NOT need a Kindle device to read a Kindle book! Read it from your browser (Kindle cloud) or mobile with a free app
I am writing this post at the request of my school friend who stumbled upon freefincal recently. Do share this post with those who still believe traditional insurance polices would help them achieve their financial goals.
I would like to keep the argument simple and not talk about returns (CAGR or IRR). Traditional policies have all sort of bonuses tagged with them and unless we take them all into account, it will be impossible to calculate the return accurately.
We will consider the problem by tipping the scales in favour of such policies. This way, we will be comparing ‘better than the best-case scenario’ with these policies against the term insurance + mutual fund route.
I. Visit LIC website and check out the New Jeevan Anand benefit illustration
Age: 30 years
Policy Term: 35 year (a bit too long but let us run with it)
Basic Sum Assured: 100000 (a pittance but easy to compare)
Premium: Rs. 269 per month (as per LICs premium calculator; no service tax; no riders)
Guaranteed Benefit after 35 years: Rs. 1,25,000
Non-guaranteed Benefit after 35 years: Rs. 1,56,000 (at 8% projected rate of return)
Total benefit without bonuses after 35 years : 2,56,000
After 35 years, if the policy holder dies, a sum of 1,00,000 will be paid.
We will be generous and add 2,56,000 as bonuses to the maturity value. We are generous because
1) we can never figure out all the complicated bonuses LIC has to offer
2) we would like to compare mf funds + term plans with the ‘better than the best-case scenario’ with these policies
3) we will assume LIC invested the policy holders money intelligently in stocks and got a bumper profit! Surprised!? Where do you think the bonuses come from, and why do you think they are variable.
Now total maturity value including imaginary generous bonuses = 2,56,000 +2,56,000 = 5,12,000
I hope all LIC agents who read this agree that the bonus sum mentioned here is ‘generous’
II. Now what would be the maturity value had we invested Rs. 269 per month in an equity mutual fund for 35 years with an average return of 10% at the end of the tenure.
Using any old SIP calculator, the answer is: 9, 14, 274
Well, a SIP of Rs. 269 is not possible but one for Rs. 500 is. We will use this below.
A 10% return from an equity mutual fund after 35 years is an extremely conservative estimate. Of course, we investing with the hope that products will be consumed and companies will profit and markets will fluctuate but increase over a long period of time.
III. What is term insurance annual premium for Rs. 150,00,000 (1.5 Crores), duration = 35 years, non-smoking male?
You can get it from Aegon Religare for Rs. 16, 517 (excluding service tax and education cess)
Or get it from LIC e-term for Rs. 42, 304 (including service tax and education cess)
We will use the more expensive premium, higher claim settlement ratio and all that sort of bull shit.
Summary I
New Jeevan Anand:
Investment: Rs. 269 per month, that is Rs. 3228 per year.
Maturity Value after 35 years: Rs. 5,12,000
Let us be even more generous and assume the policy maturity value is 2,56,000 x 3 = Rs. 7,68,000
Rs. 1,00,000 insurance cover after death.
Mutual Fund + Term Plan:
Investment: Rs. 500 per month, ( we will use this instead of the unrealistic Rs. 269)
That is Rs. 6000 per year.
Maturity value at 10% after 35 years: Rs. 16,99,395
Term insurance premium cost: Rs. 42, 304
Summary II
New Jeevan Anand:
You ‘spend/invest’ Rs. 3228 per year.
After 35 years, you ‘get’ Rs. 7,68,00 (in our imaginary ultra generous illustration)
Your nominee ‘gets’ a sum of Rs. 1,00,000 if you die after 35.
If you die when the policy is in effect, we will assume you get a sum equal to three times of what is listed in the illustration benefit
For example, death after 22 years would make your nominee richer by Rs. 2,00,000 X 3 = rs. 6,00,000
We are multiplying by three because we are assuming LIC have given out generous bonuses ( because of intelligent stock investing and lending!!)
Mutual Fund + Term Plan
You ‘invest/spend’ Rs. 6000 + Rs. 42, 304 = Rs. 48,304 per year
After 35 years, you ‘get’ Rs. 16,99,395
If you die within 35 years, your nominee gets Rs. 1.5 Cr
If you die after 35 years, your nominee gets nothing.
If you die after 22 years, your nominee gets Rs. 1.5 Cr from the term policy and Rs. 4,47,714 from the mutual fund investment.
The Thinker by Auguste Rodin. Photo Credit: Erik Drost (Flickr)
Please tell me which option is better?
If you want to convince your friends about buying term insurance and mutual fund investing, send them this post and ask them to answer the following:
1) Why is the maturity value of the policy so much lower than the mutual fund corpus?
2) What is the nature of bonuses offered by these policies? What you mean by a reversionary bonus? Is it calculated on the basis of simple interest or compound interest?
3) Why was the term insurance policy chosen for such a high value (of Rs. 1.5 Crore) compared to the insurance cover of the New Jeevan Anand Policy?
4) Feel free to add more questions in the comment section
Annoucement: My second book, Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you want, co-authored with Pranav Surya is now available at an attractive discount. You can now get or gift the paperback for Rs. 129 (usual price Rs. 199) and the Kindle for Rs. 29.70 (yes!) or you can read it as part of Kindle Unlimited. Grab it now before the offer closes! Remember that you do NOT need a Kindle device to read a Kindle book! Read it from your browser (Kindle cloud) or mobile with a free app
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video! ⇐ More than 640 investors and advisors use this!
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 2525 investors and advisors are part of our exclusive Facebook Group! 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 in an exclusive Facebook Group! 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 585 salaried employees, entrepreneurs and financial advisors are part of our exclusive Facebook Group! 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 in an exclusive Facebook Group!
My 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 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 (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author
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. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored three print books, You can be rich too with goal-based investing (CNBC TV18), Gamechanger, Chinchu Gets a Superpower! and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] comAbout freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. 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 from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only 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, seek the correct 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 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, 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 199 (instant download)Free android apps
- All calculators from our book, “You can be Rich Too” are now available on Google Play!
- Install the Financial Freedom App! (Google Play Store)
- Install Freefincal Retirement Planner App! (Google Play Store)
- Find out if you have enough to say "goodbye" to your employer (Google Play Store)