Financial Guidance

All insurance schemes of all types of money back, pension, guaranteed returns work on more or less the same principle. The return is also from 5% to 7%, usually around 6.25%. This is why the question comes “Guaranteed or assured return plans are really good options for Investment“.

You will be much better with:

a) if you purchase a Term Insurance plan of one Crore or more.  Also, the premium will be much cheaper.

b) Invest the remaining Portion of the premium in the Mutual fund and get much better returns.

I know when it comes to investing in the mutual fund there is a lot of question arise about certain things like investment safety and security, how much return it will give, is there any better option to invest. I will cover all these prospects in detail in another blog post.

Do you need LIC insurance policies?

Pros: LIC is a huge organization, with huge funds. It has been in India since the 50s. At that time, LIC policies were the only method to get life insurance and get returns. LIC used to invest part(a very large part) of our premium into the stock market and then return some part (a small part) of the profits to us at maturity.

The LIC repayment and settlement were always prompt. Thousands took LIC policies for the double benefit – insurance and saving. In fact, the LIC tagline changed to – Beema Bhi, nivesh Bhi (get insurance, get savings). LIC returns are tax-free except for pension schemes.

Cons: LIC is very poor on both counts – life insurance as well as investment. First, life cover by LIC 5 lakhs to 30 lakhs is too little. You can of course opt for more cover but the premium will be very high. Secondly, the investment return is very poor. At best the return is 6.5%.

So why is LIC very popular?

a) LIC promises an assured or guaranteed return and they show an amount that will be paid out to you at maturity (usually between 20 and 30 years). This amount sounds like a FANTASTIC AMOUNT at present time.

b) LIC keeps harping you on the fact that this money is assured. If one brings up market-linked investment, the argument against always is: Sir, market ka kya bharosa? Aaj hai, Kal Nahi? Aapko Vahan koi guarantee data hai kya? (Sir, what is the assurance of the market? Today it is high, tomorrow not so. Can anyone guarantee market returns?)

c) LIC never ever declares the returns in CAGR terms. Hence we remain ignorant.

d) We hear that neighbor, colleague, a family member purchased so-and-so LIC policy and we are also immediately concerned – I must have life cover also.

So let us compare the LIC Jeevan Anand 915 policy (the 815 is closed now). The policy sum assured is an example but the rest of the figures are based on this amount with realistic figures:

[A] Sum assured: ₹25,00,000
[B] Term years: 25
[C] Age at the start: 30
D] Policy begins in a year: 2020
[E] Premium per ₹1,00,000: ₹4,581
[F] Rebate on the premium (2%): ₹-91.62
[G] Final Premium per ₹1000: ₹4,489.38
[H] Premium per year: ₹1,12,234.50
[I.1] Premium for first year @ 4.5% GST: ₹1,17,285.05
[I.2] Premium paid for next 24 years @2.25% GST: ₹1,14,759.78
[J] Total Premium Paid for full-term: ₹28,71,519.68

[K] 125% of total premium: ₹32,26,741.88
[L] Simple Reversionary Bonus rate per ₹1000 of SA (A): ₹49.00
[M] Simple Reversionary Bonus Amount for 25 years (A/1000 * L): ₹30,62,500
[N] Additional Bonus (considered at the same rate for the final year or M): ₹1,22,500

[O] Final Benefit (Greater of A or K+M+N): ₹64,11,756
[P] Payment upon death after maturity: Sum assured = ₹25,00,000

What is the CAGR or return on investment?

• If you consider the full double benefit or O and P, it is a grand 18%!
• If you don’t consider (P) because of “what is the use of this money after my death?” reason, then it is 72%
• Have you considered the value of rupees 64,11,756 after 25 years, assuming you roll into the policy today? It is rupees14,52,263.67. It is still not bad but not grand as it looked, does it?

Quick review on stock Market, LIC, and Mutual Fund

Till the mid-eighties, the stock market was just a steady performer. There was very little buoyancy. There were only a few stock exchanges – just four (BSE, DSE, CSE, and MSE) and some branches. You had to trade physically and via a broker. One did not understand markets – even today also very few do understand.

Then Harshad Mehta scammed his way to dizzy heights. This caused great interest in the stock market as well as scarred people who lost money. LIC remained a winner. Mutual Funds were unknown till the late 90s and only became popular when SIP was introduced. On top of that, there was no term insurance (or LIC never promoted that) and there were no independent private insurance players. Hence LIC reigned like a king.

Today LIC tactics are changed. The argument from all LIC employees and agents is – long-established, always settled (the actual settlement ratio is 98%), trust over the years, government-backed – will not run away with your money, will not fail, etc.

But the biggest argument against Term Insurance by these people is – you are paying all this money but not getting anything in return? Nobody, repeat, nobody gives the real comparison.

So, the alternative?

a) A Term Insurance plan of ₹50 lakhs or more. The premium will be much cheaper. See examples at the end.
b) Invest the balance of premium in MFs and get much better returns.

Comparison of LIC and Mutual fund in Return Prospective

a) For a LIC premium of ₹9,572 per month or ₹1,14,861 per year, you are getting a paltry ₹25 lakhs cover. For ₹12,000 to ₹14,000, the same 30 years old, a non-smoker person can get a ₹1 Cr cover. For as low as ₹778 pm or ₹9336 pa, you will get twice the cover of LIC or ₹50 lakhs.

b) One will be quick to jump, what about returns? So here is a comparison with investing in MF SIP

[Q] LIC Payment per month ((J/B)/12): ₹ 9,572
[R] Term Insurance for 50 Lakhs up to 65 years: ₹ 778
[S] MF SIP per month: ₹ 8,794
[T] MF Investment term in years (B): 25
[U] SIP Return: 10%
[V] Corpus at the end of 25 years: ₹ 1,17,65,408
[W] Own contribution: ₹ 26,38,200
[X] LTCG Tax on MF at 10%: ₹ -9,03,863
[Y] Final MF Corpus Value (V+X): ₹ 1,08,76,262
[Z] Difference (Y-N): ₹ 44,64,506. (I am not considering Death Benefit here because it is of no use to me. Even if I did, it is ₹ 19,64,506 more and lest one forgets, if the MF corpus is untouched, assuming 25 years of vesting, it will grow to ₹ 12,76,34,190.)

c) Do You think MF is risky? Then try PPF. The limit is ₹ 1.5 lakhs per year. But by investing for the same 25 years, you will get₹1,10,39,881. But this assumes a 7.1% constant maturity yield and that can change. Still, it is unlikely to come down to less than 6.5%. And this amount is tax-free also.

What if you put your money in PPF

Here is the table:

So there is the same cover for you as LIC but much much better in respect of more life cover and more return.

Twice the life cover and ₹ 44,64,506 more than LIC. What double benefit? What returns? Is this even comparable? Some will be quick to jump that 10% returns are not possible in MF. I will simply say – please go and re-examine. It is quite possible and in fact, I have achieved higher results of 12.75% since Nov-2007.

In the last 5 years, I have achieved 22.13%. 10% is very-very modest and completely possible as long as you do your research, select the right funds, keep monitoring returns and take remedial actions like switching. Markets rise and fall but over a long term of 25 years, you will always get a pretty decent return because of the power of compounding and hedging, and averaging due to SIP. I can promise this at least based on my own experience.

One USP about LIC is that it allows loans on the policy. Hogwash! The loan amount is 90% of the policy surrender value at the time of the loan, not the sum assured. The policy does not allow getting benefits early. If you wanted early benefits, the only way is to surrender the policy completely. With MF, you can dip into the corpus at any time. No need for a loan.

So guys, please believe me when I say … No endowment or money back policy is good. Not only it is not good, but it is also PATHETIC!!! Do not fall in for false promises.

Why do people buy insurance policies of “Guaranteed or assured return plan”

Unfortunately, people ask this question after they have already enrolled in the insurance policy. Unfortunately, people fall for the phrase “guaranteed and assured return”. People also look at the assured return amount and never think that how inflation is going to affect the amount. You are not alone.

I too have fallen prey to these insurance policies. Eighteen years ago, I signed up for a LIC Jeevan Anand policy with a coverage of 5 lakhs and a premium of 22,336. After 25 years, I would get 5 lakhs. In 2003, 5 lakhs was sounded like a very tidy amount to me. What does it sound like today?

Today, I am paying more than this amount in Income tax alone. The CAGR is a paltry 6.73%! Like many others, who are not financially aware, I realized this pretty late – just a year ago. Now that the policy is maturing in 2028, I now think that it is better to continue. This is exactly what happens.

Lesson 1: All assured and guaranteed plans have a poor return on investment ranging from 5.25% to 6.98%.

The Jeevan Umang example is already explained. Let us look at another example. This time I will explain the HDFC Standard Life Sanchay Plus scheme. My bank, HDFC, tried hard to sell me this policy some time ago. Here are the broad highlights of the plan that I was shown (there are many variations):

Policy Name: HDFC Life Sanchay Plus
Policy Term: 6 years
Premium Paying Term: 5 years
Premium: ₹6,00,00 + GST (4.5% in first year, 2.25% in next four years)
Sum assured: ₹62,10,000
Guaranteed Pay-out: ₹1,99,500
Guaranteed Pay-out period: 30 years
Terminal Benefit: ₹31,99,500

What does this jargon mean? This means I will pay 6,27,000 in the first year, 6,13,500 in the next four years, 6 years is a cool-off period for me (I don’t need to pay, I don’t get anything). From year 7 onwards I get 1,99,500 as guaranteed income per year for the next 29 years. In year 37, I get 31,99,500. If I happen to die anytime during the time the policy is the force (next 30 years), my survivor gets 62,10,000.

Does this insurance policy sound beautiful? I am sure that at the first reading it does:

• सिर्फ पाँच साल प्रीमियम भरना है (I have to pay a premium for 5 years only)

• 7 वे साल से अगले 29 साल, हर साल लगभग रु 2 लाख मिलेंगे (From year 7, I will get nearly ₹2 lakhs per year for next 29 years)
• 37 वे साल लगभग रु 32 लाख मिलेंगे (In year 37, I will get nearly ₹32 lakhs)
• बीमे की रकम है; कोई टैक्स नहीं लगेगा (All payouts are tax-free because this is insurance payout)

It is only when one does digs deep, performs the calculation of the return, then one can find out the real truth. Assume that you are 40 when you sign up. This is the chart:

Please compare real values vs. inflation-adjusted values. I have considered a 5% constant inflation for all the years. Does this bring out the stark-naked truth? Here are the astonishing facts!

• What do you think is the CAGR or actual return (4th column)? Return is a paltry 5.29%!
• Now hold your horses, take a deep breath, relax completely, and be prepared to be knocked off. What is the inflation-adjusted return? Inflation-adjusted return is 0.20%!!!
• You paid an inflation-adjusted ₹27,89,207.90 as premium and you received inflation-adjusted ₹ 28,01,727. The net payment you get is ₹ 12,519.10.
• This means that there is no extra return at all. You are barely getting your money back.

How you get benefited from the SIP Route of investment

Now imagine, that you saved ₹50,000 per month for 5 years in a Mutual Funds SIP. Then let the same money invest in the Mutual Fund for the next 31 years. I am going to assume a very-very conservative return of 10%. This is what it will be.

After 5 years, your SIP corpus will be ₹39,04,119 as shown below:

Now let it remain in the same Fund for the next 31 years. No more investment. In the end, at the same 10% average return, you will have a corpus of ₹7,49,36,111.

Even if you pay a flat 10% LTCG on this it will ₹7,49,3,611 and your balance at hand is ₹6,74,42,500. If we adjust this post-tax sum (₹6,74,42,500) for inflation at same 5%, it is ₹1,12,01,079 at today’s value.

I wonder what you would like now? Friends, I would rather have ₹1.12+ Cr than some ₹28 lakhs.

Few things to know about LIC:

1. GOI has nothing to do with this (LIC policies). LIC is an independent company having its own legal status, chairman, MD, board of directors, etc. Government happens to be the majority shareholder. The GOI does not tell LIC which policies to issue and what should be the T&C, returns, etc. LIC does that. GOI interferes with some other things regarding employment guarantee, reservations, promotion policy, etc.
2. LIC policies are not bogus. They offer what they say they will offer. There is indeed a guaranteed return. It is just that the returns are low.
3. Agents do not tell you the whole truth. It is the LIC agents who are at fault. Perhaps they are also under a misapprehension. But the fact is that the agent tells you and sells you a dream. We are duped by the dream. However, the dupe is not to understand the effect of inflation. So we are equally at fault for purchasing something on a promise and not understanding the product correctly.