Life Insurance is nothing but the insurance covered for your Life. In case of death the sum assured is given to the nominees.Unfortunately in India, people see Life Insurance as Investment Product and not as an Insurance Product.
They don’t understand that insurance gives financial security to their dependents in case of there death, rather they see it as the last benefit provided to them and the most important thing for them it that they get the money back in case they survive the tenure of Insurance.
People are ready to pay higher premiums to Insurance Companies for a policy which gives them death and survival benefits like Endowment plans and Money back plans.
People are not ready to pay premiums if they don’t get any thing in case of surviving the tenure and that’s the reason why Term Insurance never became popular in this Country. That’s also the reason why many people are under-insured because of the high premium, they cant pay for higher insured sum.
Many People even don’t know that Term Insurance exists, the reason for that is their insurance agent never told them about it, because they get a very little commission on it unlike Endowment Plans.
Life Insurance is to provide a good enough cover to dependents in case of death. This is the only target of life insurance.
Case Study
——————-
Rajesh is a salaried person with salary around Rs 20000 per month , He has 2-3 dependents like his parents and wife.
Rajesh can afford maximum of 10% of his salary as insurance premium outgo in a year.
So Rajesh takes Endowment plan of Rs 10 lacs for 20 years in 2005.
- If he dies between 2005 – 2025 , his family will get Rs 10 lacs.
- If he survives till 2025. He will get Rs 10 lacs .
- Monthly premium = Rs 2,000
- Total premium in an year is 24,000
- Cover : Rs 10 lac
There are some points to consider here.
- He is highly Uninsured , Rs 10 lacs is very less amount to get covered . He needs at least Rs 25-30 lacs as cover , as he have financial dependents.- The premium of Rs 2,000 monthly or Rs 24,000 yearly is not a small amount at the moment and adds to his financial burden a lot.
- In case of survival he gets Rs 10 lacs , but in 2025 . Considering inflation at an average of 5% , the current value of that amount will be Rs 3.5 lacs. Which means in 2025 the value of that 10 lacs will be very less and considering that after 20 years rajesh will be earning very good money and Rs 10 lac at that time will be a small amount for him , may be less than what he may be earning in a year. It means It does not benefit him a lot after 20 years.
He could have solved all of his problem if he would have taken a term insurance instead of Endowment Plan …
If he takes Term Plan , he can get a lot more cover in very less premium , and can invest the surplus money in much better investment avenues like Diversified Mutual funds or Equities.
He can take a term plan of Rs 30
lacs for 30 years , with an annual premium of 9,000 per year . (including service tax , approx).
So instead of Rs 24000 in a year he can just pay 9,000 can be covered for 30 lacs and that too for 30 years.
He can invest the extra 15,000 (24000 – 9000) in diversified mutual funds with good track record for next 20 years through SIP every month or yearly lump sum .
Equities in long term outperform all the investment options , In last 10 years HDFC taxsaver has given around 43% CAGR … that’s the magical returns one can expect … SBI MAGNUM Taxgain has done much better …
Let be on the safe side and be pessimistic and consider returns around 18-20% CAGR for next 20 years..
The investment will be worth
- Rs 16 lacs at 15% return
- Rs 22 lacs at 18% return
- Rs 28 lacs at 20% return
- Rs 94 lacs at 30% return (less chance)
- Rs 3.14 crore at 40% return (very less chance)
remember that this is for 20 years and not 30 years. In 30 years it will be much much more … for eg at 20% it will be 1.77 crores and 13 crores at 30%.
If we consider this case : when he has taken Term Insurance He is in profit at any point of time
- If he dies early his family will get 30 lacs + some investments
- If he dies late , his family gets 30 lacs + his investments which has grown a lot now.
- If he survives , his investments are enough
The biggest thing to consider is that his Family is covered with good amount in case of his death , which is the main factor and sole idea of Life Insurance.
According to me , Endowment and Money back plans are investment products with a pinch of Life insurance in it. Term Insurance are the best , simple , “pure life insurance” and “must have” product.
I am not against Endowment policy or Money back Plans , but they have a different motive.
Dont see what it takes from you , see what it gives you.
I would be happy to read your comments or disagreement on any topic. Please leave a comment.
{ 27 comments… read them below or add one }
Great work manish, I have got the clear meaning and difference between inssurance and invesment product, from this article I got the meaning of inssurance.
I’ll remember last line, “Don’t see what it takes from you,see what it gives you”
thanx a lot, GR8 work!!!
–Sachin Kor.
I read a few articles on life insurance. The rule of thumb when calculating insurance is that you should be covered for about 6-7 times your current annual income. This is a conservative figure and the ideal figure should be about 10. One needs to take into account the inflation and a person;s increase in income over the next 10 years or so.
Also, one should adjust this amount at important steps in life. Events like marriage and kids will add to your financial ‘burden’ and hence your cover should be enhanced.
By this rule, your guy needs a minimum cover of 15 lakhs and an ideal cover of 24 lakhs. 30 lakhs of cover is a bit high, but a good number indeed.
Hello Manish
Your article on insurance is really a good one. Though, I have been investing in MF, PPF and so on, I do not have insurance policy yet. I would like to know more on ULIP. My agent gave me a illustration of policy that covers whole life, I would like to know more about the ULIP (hidden cost especially) and answers that I need to know.
Hi Murthy
Insurance is an important thing , please read more on
Please read about ULIP at
Dear Manish,
The above article would be the simplest way one can explain " how to do Life insurance planing "
Thank
Shekhar
Hey Manish,
Thanks for this fantastic blog!
I have a small Q: Recently I ran into a insurance agent who wanted to sell me something, I insisted that I get a term insurance for 50 lks. But he kept on pushing for some moneyback kinda policies. (May be they pay higher commissions to him) Finally he suggested me ‘Jeevan Amrit’ from LIC which he says is a term insurance. For 50 lks (30 yrs duration) I had to pay 1.89 lk in 1st yr, 89k in 2nd yr and 89k in 3rd yr and thats it.. If i survive the 30 yrs I get back the money i initially paid PLUS 6% simple interest for all the 30 yrs. The other Term insurance they had was amolya jeevan where for 50lks coverage of 30 yrs, the annual premium is straight 16k. Can you give your opinion on which option is better?
link for LIC page: http://licindia.com/endowment_007_illustration.htm
Vinayaka CA
Oh my god .. Did that agent say that “Jeevan Amrit” is a “term Insurance” . I cant imagine this kind of immature and unproffesional behaviour . Not that I doubt their bad quality of advice , but this is height ..
“Jeevan Amulaya” is the name of Term Insurance from LIC .. go for it only .. Dont take “Jeevan Amrit” .. It can turn out to be poison for you
Manish
Thanks again Manish..
I just realized how bad the Amrit is in comparison to Amulya !
Nice to know that .. Correcting the mistake is good .. making is ok
Hi Manish,
I have one endowment policy ( 15 Yrs) in my name (1. 75 lac) which was mistakenly done by me in the year 1999. That time one of my relative was LIC Agent & they said it is like forced savings for you, everyone is having LIC why not you , bla bla…
That time I was just college pass out so had no knowledge about invest ment , niether internet was available to gain self knowledge.
I would like to know what if i discontinue those policy now . As we all know now how low the return is . Even a recurring deposit fetches more return. Would LIC deduct any charges for this & what would I get at the end of maturity of policy.
Regards,
Raja
Raja
Now you have passed 3 yrs in this policy so you are eligible for Surrender . So you can either surrender or make it paid up .. Look at http://www.jagoinvestor.com/2009/10/what-to-get-rid-of-your-junk-insurance.html
Manish
must say after reading your blogs and few articles earlier from forbes magzines, got to know about this amazing trap of endowment plans….but there must be some thing good in these as they are being sold by every organization…definitely good for financial institution but whats good for investor…..data shows its just equivalent to suicide by the investor…why are these still in selling..whats good in there for investor in endowment plans so as every one 1 generation up i know have these endowment plans…
Sandeep
I would say that each and every company has these products to make more of money . The products are profitable more to company than the investor . We indians love safety and thats the reason we love these endowment products . Our fathers and grandfathers were investing in these things and they are wrong , we should not feel bad saying this .
manish
Dear Manish,
I came across a article where a LIC agent says that all other insurance companies other than LIC are making loss. How can they pay back you in case you have term insurance ?
Can you please throw some light on this ?
Dharmaraj
Thats not the correct way of looking at it . Every company makes losses in initial years of operation , they break even as per their model . If you have correctly filled the form , then you dont have to worry .
Manish
Dear Manish,
Thanks for reply. What do you mean by correctly filling form ? Are you saying about reading fine prints or something else ?
Many people policy gets rejected for the simple reason that in hurry they do not fill the details in the form correctly . So make sure you fill it correctly
Manish
Also one of the LIC agent told me something like this.
Suppose I have 3-4 LIC policies with me.
I am paying installments regurarly for 2-3 policies. However I could not continue my other 2 policies and those are lapsed. As per him, in this case I’ll not get benefit from LIC on regular policies ? Is it So ?
you may think this is silly question ! but it really frightens me.
I dont think this makes sense .
It will not that be way
Manish
@ Dharmarj,
If you have paid premiums for 3 years and then stopped paying, then the policy goes into paid up mode. For such policies the benefits will be proportional to the no of premiums to be paid and no of premiums paid. Just because some other policy has lapsed, does not mean that benefits of policies for which premium is paid regularly, will be reduced or declined.
Hi manish
This is mukesh a regular reader of your blog , i have come across a endowment policy from LIC , which is basically a child education policy where annual prem is USD 2730 for a cover of USD 40000 and going by the profit rateof liC the agent has taken USD 50 per thousand as the rate and provided a maturity value of USD 72000 in the illustration , i have done XIRR of this plan which comes to be 6.45% …. i know going by your logic term plan + MF/equity will definately give me higher return , but as this is a child education plan will it make sense to go for this as the plan also provides the benefit of premium waiver so if parent dies family will get the USD 40000 and on maturity child will get $40000 with bonus which can be really good for the family
Mukesh
In case you die early , the IRR will turn out to be fantastic from this policy
. But if you dont , then the IRR does not look attractive . Waiver of premium option will be great but what are the chances of you actually making use of it .
Manish
but that is the risk we cover thr insurance , if nothing happens to insured then you loose and insurence company wins .. the only flaw with term plan + MF option is that we expect the family to contnue the SIP etc with the term plan money and be market savvy…may not be that easy for them
in this plan surviving parent will get one lump sum on death and some reasobale amount is also left out for the child edu so surviving parent need not to worry on that front also
Mukesh
You way to looking at term insurance is not correct . The feeling that term insurance does not pay anythign at the end and company wins is not the right way of looking at it . In any case its a win win situation , company makes their estimated profit if you survive , that all comes by taking a huge risk of insuring you . so if they made money and you didnt get anything , its pretty fair from business point . If you die and make money , its again fair , because company took the risk and insured you .
Manish
point taken , then the same applies to endowment policy also .. they take risk of the lfie of the insured , if insured survives he gets lesser return and company gets profits and vice versa if insured dies earlier then maturity
any how , the question is with regard to this plan …does it makes sense as surving fmaily need not to worry on the child education etc
hi,
i want to know about jeevan rekha policy. currently that policy is alive or not.
Namsivayam
Its launched in 2002 only , I think it should be alive , contact your agent .
Manish