I am still appalled to find many people still buying life insurance policies( especially endowment/single premium/money back) for the purpose of investment. When you are investing your money, you want to have returns that beat inflation for a longer period of time. When you are buying life insurance, you are doing so to protect your family against financial distress in case of your sudden death! The two objectives have nothing in common.

In India , financial advisors ( read insurance agents) sell these policies in name of tax saving,bonuses,long term returns etc. If you see the hard fats, most of such policies won’t yield you more than 5% in the long term. Let me give you an example:

Lets look at a benefit illustration of LIC Endowment Plan:

http://www.licindia.in/New_Endowment_Plan_benefits_illustration.html

As you can see, a 30 year old health male is paying about 2900 per Lakh of insurance. So what does the person get @4% returns- 2.4 lakhs. (don’t even bother to look at 8% returns as LIC bonuses range between 3-5%). Now when people sell you this policy, then 2.4 lakhs looks like a huge amount at maturity but actually you’d have actually put about 90,000 as investment in this plan and you won’t even double your investment in 35 years! ( The reason for the same is the fact that the bonus is not compounded and the bonus rates are too low- thats double whammy for any long term investment!). Also not to forget- you can’t sell your investments for 35 years(unless you are willing to take a loss on your investments for a surrender value)

Money back policies are even worst in terms of returns but play on the investor psychology of “getting his money back”.

Now look at the insurance bit- by paying 2900 per annum, you are getting a cover of just 1 lakh whereas a similar sum can buy you a 25-50 lakhs of term insurance cover! Get a quote here.

So next time when someone coaxes you to buy a traditional/endowment plan- ask him/her these hard questions. This might be a good time to take a fresh look at your insurance and investment portfolio.  Also remember that money decisions are not to be taken based on emotions but based on data and your financial goals. You work hard for your money, let it work even harder for you.

Also see- Are Endowment plans any good for wealth creation?

Since most of the life insurance policies in India are still sold as “savings and investment”, endowment plans( also known as traditional life insurance plans) are the most popular of the products. This trend was started by LIC of India ( oldest insurer in India) whose agents goaded investors to save and invest for the long term for their retirement or for their children’s education and marriage. Indians being the great savers they are, were easily lured into such plans. In other cases, these life insurance plans have been sold as the best “tax saving instrument”. And the reason for pushing these have been the commissions earned by the agent of LIC of India for these plans. Now look at the reality of wealth creation by such life insurance plans.

I will take an example of HDFC Life Endowment Plan for a 30 year old male ( results will be similar for other insurers like LIC of India).

Sum Assured- 10 lakhs

Duration- 20 years

Premium- 47000

Maturity Amount @ 6% bonus- 1357000 ( Realistic)

CAGR – 3.7%

Maturity @10% bonus – 1958000 ( Best Case)

CAGR – 7.1%

As Life insurance companies in India typically invest in government securities, your typical bonus would actually be closer to 6%( look at this bonus table from LIC of India), hence your CAGR would be around 4%. Please make a note that most of these bonuses do not compound.

Can you see the real truth behind these measly returns? Would these be enough for your future needs?

Now lets took at an alternative of buying a ” term insurance + Tax saving MF ” – this will give you the same insurance and tax benefits as the endowment policy. The intent is to compare the “wealth creation” element.

Assuming premium paid is 47000 ( same as in the endowment plan)

For sake of comparison, I have taken HDFC Life Insurance policies only

Premium for a 10 lakh life insurance policy for 20 years ( HDFC Life) – 2600

Investment of 44400 in HDFC Tax Saver for 20 years.

Rate of return- Although this fund has given 29% for last 14 years( since 1999), we will be conservative and take an expected return of about 12%.

Maturity Amount (12%)- 32 lakhs

Maturity Amount (20%)- 82.89 lakhs

Can you see how buying an endowment plan actually reduces your chance of any wealth creation! Give this illustration a thought before you buy your next endowment plan. One should never buy financial products based on “gut feel’ or “hard sell”. Look at the hard data and historical evidence.

So ask these questions from your LIC advisor before he comes knocking at your door for the next fabulous plan.

If you have been stuck in endowment plans, this might a good time to surrender or make it a reduce paid up policy ( if you have paid for 3+ years). No point throwing good money after bad!

If you are near the maturity of an endowment plan, then you better increase your coverage by buying a term insurance. If you need help with your current situation or buying life insurance policies, feel free to contact or check www.trucompare.in for an online quote.