Today we are going to see why Endowment policies should be avoided in any portfolio and how other things are much better than Endowment policy with the same cost .
The assumption is that you understand what are Endowment policies and What are Term Insurance Plans , if you dont know click here to read about it
A look at the Endowment Policy
Tenure : 30 yrs
Yearly premium : 31,000
Sum Assured : 10 Lacs
Maturity amount : 23.1 Lacs lacs ( this you get when you survive full tenure , It includes the sum insured + Bonus accrued)
This data is from website of an Insurance company .
Q . How much money to be paid every year? How much will the person get in case of Death or Survival ? What are the Risk factors ?
Ans :
Tenure : 30 yrs
Money outgo : Yearly 31,000/yr
Money received In case of Death : 10,00,000
Money received In case of Survival : 23,100,000
Risk : Virtually no risk (The only risk is when the Insurance company goes bankrupt)
What is the interest earned on this investment ? 31,000 per year for 30 years becomes 23,10,000 .
Annuity formula is :
Maturity value = Amount paid per year * [ {(1+r)^n - 1}/r ] * (1+r)
Here n = 30 years
and r = rate of interest earned
Putting all these values
23,10,000 = 31,000 * [{(1+r)^30 -1}/r] * (1+r)
The value of r which satisfies this equation is 5.4 . Which means that the interest earned by the investment in Endowment policy is mere 5.4% , which is truly pathetic by any standard in India at least . There is no investment product known which is known to pay so badly .
The reason why people feel that endowment policy are so good is that they also get insurance cover ( which is virtually useless because its so less that it does not even cover the financial dependents to even a fraction of what they need in reality)
So can we mix Insurance + investments product which can be better than supremely better than Endowment policies and still cost the same( or even less) .
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Now let us see that by spending same amount (30,000 , 1,000- less than the endowment policy) every year for 30 yrs , can one achieve better than this .
1. For Safe Investor (Let us first see a almost 100% safe way to do this)
Term Insurance of 30 Lacs for 30 yrs : 6k
Investment of 24k in PPF for 30 yrs : 30 Lacs (this is assured returns , as its invested in govt backed PPF , which gives 8% post tax return)
Amount invested = 30,000 per year for 30 years (same as Endowment policy)
Amount received on death : 30 Lacs + investments done in PPF
Amount received without Death : 30 Lacs (investments)
2. For Aggressive Investor ( A person who can take more risk that the former one)
Term Insurance of 70 Lacs for 30 yrs : 14,157
Investment of 17,843 ( 30000 – 14157) in ELSS for 30 yrs assuming 15% CAGR : 92 Lacs
Amount received on death : 80 Lacs + investments done in ELSS
Amount received without Death : 92 Lacs (investments)
Equity investments for long term are almost risk free.
So , we can see here than in any case term insurance + MF is supremely better than Endowment policies .
Solution for People who have taken fresh policies
People who have already taken fresh policies and have not completed 3 yrs should just forget there payments and stop there premium payments. The profits of switching from Endowment to “Term + MF” will be far greater than the loss from leaving Endowment policies .
Solution for People who have completed more than 3 yrs
Either convert your policies to Paid-up or just surrender your polices and take the Surrender value (take your call on what you are comfortable with)
Solution for people near the Maturity
You have almost paid most of the installment , so better stick with it , but don’t forget to insure yourself to a respectable cover through term insurance
Summary
Endowment policies according to me are totally incorrect and worst product i have ever seen (ULIPS are not far behind) . It is structured and presented in such a way that investors are attracted to it . Agents present them in such a fancy way and give judgements which make these policies look like must have products.
Disclaimer : The exact figures can differ , this is just a demonstration of how Endowment policies can not be better than Term Insurance + MF combo . All the Insurance premium are for Aegon Religare Life Insurance and Mutual funds payments are considered monthly (amount/12) .
All the view on this article are personal, some people may disagree with it which is totally acceptable .
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This is an eye opener, I must have read this for 3 times for me to believe it. I am paying 150000 on an endowment policy and in my third year. I will definetely Q my LIC agent and ask him his reasoning. It is really helpful thanks a lot, please keep it coming you are doing really good for the society and you will be benefited by spreading such knowledge it gods own way.
Thanks
Nitin
Can you please suggest an LIC term assurance policy.
I read about Anmol Jeevan and Amulya Jeevan. It looks good to me.
But just wanted your view on it
Thanks
Nitin Pillai
@Nitin
Jeevan Amulya is a good term insurance policy , the biggest advantage is that its from LIC which is most trusted and respected and i would also say “safe” Insurance company . The claim rate is the best . so incase of any cliam , its almost sure that it will be paid .
Other Insurance companies you can look at are SBI life Insurance and a new one called “Aegon Religare Life Insurace” . as far as i know they are one of the cheapest in market .
http://finance-and-investing.blogspot.com/2008/10/aegon-religare-life-insurance-this-is_06.html
Manish
I liked what is read about “Aegon Religare Life Insurace”, but as its a new venture a bit hesistant. Also really like SBI shield so will compare LIC and SBI and will make a decision.
Thanks again Mainsh
Sure
Religare Aegon is new one but its not a unknown name in World market . One of the things you can do is Break your insurance into 2 policies . One in LIC and other in SBI or Aegon Religare . This will have two advantages :
1. It will diversify the risk .
2. It can help you later when you want to decrease your insurance cover , in which case you can just stop on of the policies . If you take just 1 policy you will have to stop it later and take new one , which will be costly at that time because of high age factor .
So better go for 2 policies in different company .
- Manish
After reading this post which was an eye opener for me, I spoke to my LIC agent, he was just trying to convince me to stick to the policies, his reasoning was we should always have debt investment. But after reading your article I was enlighten about what I need to do. He sent me all the details about my policies, the figures are as under:
1) Endowment policy 1 (03/2004): Premium paid: 99500, Surrender value:48500/- (21 years)
2) Endowment policy 2 (02/2007): Premium paid: 263000, Surrender value:0/- (17 years)
Endowment policy 1 projected maturity amount is 1405000/-
Endowment policy 2 projected maturity amount is 3574000/-
I took a annuity for both policies it gives a return of 5% at the end of said term.
If I surrender both my policies I will take a loss of 214500/-, I want you frank suggestion:
1) What would you think here in terms of numbers and what decision would you take ?
2) Will you continue the 2nd policy for another year and take a surrender value of 30% or end it now?
3) Another scenario is If I decide to surrender my 2nd policy now I take a loss, I am left another 15 years and if I take an annuity for 15 years term its 7% returns. So is it worth taking the loss or continuing further. This is what my LIC agent asked me, I told him if I continue further I will not think 15 years but 17 years so its still 5% returns.
I would appreciate your response.
Thanks
Nitin Pillai
If you ask a person who has his living associated with LIC agentship , he will obviously give you all sort of reasons why its good or Bad, its a same like a company taking your advice in whether to use JAVA or .NET or just C++ ? U will give reasons to him which will look obvious
Anyways … lets look at the subject .
you are paying 23k for 1st and 130k for second policy . which is total of 150k per year , this is a great outgo as i told you already .
Let us do some analysis of this maturity value . The first thing is that you will get 50 Lacs after 18 years . i am considering that you are retired by then and want to enjoy like with this money , what kind of monthly income will this provide ?
50 lacs today provides 35k per month (risk free) or max 45k . i am sure today your expenses must be 20-30k per month (india) and after you are married and once you have children , your monthly expenses will go to 35-40k . This is your projected monthly expenses from todays startdards . If you calculate your monthly expenses after 18 yrs considering 6% infation . It should be 1.1 – 1.2 Lacs atleast . Which is way above what that 50 Lacs could provide at that time . Which means that this LIC policy maturity value is not at all sufficient for you , and for this insufficiency you are paying so hefty money for under insuring your self
.
Why would you pay another 1.3 lacs and then get 1.2 Lacs back (30% of 4 lacs) after 1 years . If you leave it now , you will get loss of what you already paid . If you leave that policyg now you will get 2.6 lacs loss , if you leave it after 1 year , your loss will be 2.7 Lacs . Better to get out now
This will look like a big loss now (2.6 lacs , a big sum) . But if you keep putting that money for another 15 years , you will put 15 * 1.3 lacs = 19.5 lacs .
If you divert all your 1.5 lacs from today in PPF + MF + Term Insurance , it will look like
For each year (for 18 years)
20k : For 80 Lacs Term Insurance for 30 years (25k for LIC Amulya Jeevan)
30k : PPF (Debt) @12%
1 Lacs : Equity DIversified Mutual Funds , returns assumed at 15% (pessimistic view)
PPF will return : 12.5 Lacs
Mutual Funds will return : 87 Lacs
Total = 1 Crore at the end of 18 yrs from Now , even this money will not be able to give you what you want at retirement , but its certainly better than what you are getting currently with your Endowment policy.
Also , better not to commit so high expenses to Endowment policies , there can be risk of Job or any thing else , from where will you pay to them if your Job is in danger or anything of that sort . IN PPF or MUTUAL FUNDS no one will say anything to you .
Make sure you evaluate what i said to you and re-plan your stuff .. please understand that you are laible for your decisions and no one else .
Manish,
You are just awesome in your thinking, you have truly enlighten me. Now that I know this I can surely spread this knowledge to my friends. Infact I had forwarded your blog link to few of my friends so that they are benefitted from this.
Had a question about PPF where you said the return are 12%. I understand its 8%, are you also adding the the tax benefit to come to 12% Or am I missing something here ?
Thanks
Nitin Pillai
I was wrong at that point , 12% is the pre-tax returns , Actually if you consider Bank FD , they provide 9% returns but for a person in 30% bracket , it comes to be around 9 * .7 = 6.3% return (post tax) .
Using the same thinking because PPF provides 8% post tax return . Its said that it provides 8/.7 = 11.42 (approx 12%) returns pre-tax (just an assumption that tax will be cut from it , like other debt products) .
So the correction fro my side is that you must assume that you will be paying tax on PPF part of your investments , which will bring down its reuturns a bit .
As indian Tax laws are getting better for investors year by year . i truly feel that after 15-20 yrs the tax figures will look so good to investors that it will conme to be 12% returns for sure in long run
Thanks for the correction
- manish
I don’t know how you get the maturity figure of 23 L.
If you go for plan no 14 and consider the bonus amount of 48 /1000(which lic has declared for prev fin year and FAB of 500/1000 S.A. it comes to
10 L + 1440000 + 500000= nearly 30 L which is nothing but a very good return and amount is tax free as well.
No doubt that term + PPF as you have pointed out is a good bet but in no circumstances term + mF is good ,many financial planner are fooling just to increase the selling of SIP’s and ULIP of their fav companies and they are no way secure, current market condition are the best eg. However it is always a gr8 thing to diversify your saving and distribute your money toward risk free and high return instrument.
The good thing of PPF is only 15 years lock in and partial withdrawal.
And if you talk of longer horizon End are one of the best to generate good return the only worst thing is you end up paying heavily if you surrender in between.
I don’t know how you get the maturity figure of 23 L.
If you go for plan no 14 (http://lifeinsureinfo.blogspot.com/2008/07/endowment-with-profitplan-no-14.html)and consider the bonus amount of 48 /1000(which lic has declared for prev fin year and FAB of 500/1000 S.A. it comes to
10 L + 1440000 + 500000= nearly 30 L which is nothing but a very good return and amount is tax free as well.
No doubt that term + PPF as you have pointed out is a good bet but in no circumstances term + mF is good ,many financial planner are fooling just to increase the selling of SIP’s and ULIP of their fav companies and they are no way secure, current market condition are the best eg. However it is always a gr8 thing to diversify your saving and distribute your money toward risk free and high return instrument.
The good thing of PPF is only 15 years lock in and partial withdrawal.
And if you talk of longer horizon End are one of the best to generate good return the only worst thing is you end up paying heavily if you surrender in between.
Good one bro… People are not so aware of the returns % that an endowment policy would give them.
The main reason for the same is the commission we pay to the agent who sold us the policy.
The same story was what I was explaining a teammate of mine who took an insurance policy for investment.
Good work
Keep it up..
@Bhargav
Hi Bhargav , Thanks for your comments .
The example which i gave in my article was for one of my frinds who took some policy 5-6 yrs ago .
Lets leave that example aside and take your example and discuss it .
http://lifeinsureinfo.blogspot.com/2008/07/endowment-with-profitplan-no-14.html
Tenure : 25 yrs
yearly premium = 38820
Maturity benefit = 30 lacs
Some questions for you .
1. Please let me and and readers know why do you consider this plan returns are good . I calculated the returns of this policy and it came out to be 6.25% CAGR . Is that a good return ?
2. Is the Cover provided by this Plan (Rs 10 lacs) enough for a average person . I assume the person who pays an yearly premium of Rs 38820/year , must be earning 4-5 lacs year ,DO you think 2 times him yearly income is enough for this person’s family for whole life ?
3. You feel that Term + MF is risky (may be they are) , in that case what do you think about Term + PPF ?
If this 30 yr old person take a term insurance of 30 lacs for 25 yrs , the cheapest premium i can see are around 7,000 , He can invest 38820 in a year in this way .
Term (7,000) + PPF (31820)
In that case , from start to end , he will be covered for 30 lacs and at the end he will get 30 lacs.
Annuity Formula : (31820 * 1.08 * (1.08)**25 )/.08 = 2941899.4900399372 (Almost 30 lacs)
Even if he dies within 5 yrs , he will get 30 lacs , but in the plan 14 , he wont , Dont you think life is uncertain and anything can happen anytime , so better idea is to consider worst case.
4. Why do you feel that Term + MF is not a good idea? Dont you expect Indian markets to return even 12% in next 25 yrs , i beleive it will return 15% + atleast …
Dont you agree or trust Historical data for Equity returns ? (India and Global)
Do you know any year Y , where Y+25 yrs returns have been less than 12% ?
I beleive 12% returns in Equity in next 25 yrs is an understatement . It should be more than 14-15% . i know its not guaranteed and not 100% sure, but what shoulnt we trust 99.99% probability ?
5. As per my assumption in question 2 , where i assumed the annual income of a person as 4-5 lacs , what do you expect his/her monthly expenses to be ? I beleive atleast 20k , 30 yr person will be married and will have kids probably , if not now than after some years . Atleast then his/her monthly income will shoot up to 25k per month , which means 3 lacs/year .
If we expect inflation to be 7% per annum and do a simple calculation , we can see that his future expenses after 25 yrs would be
3 lacs * (1+.07)^ 25 = 16.28229 lacs/year
Which means that the money he gets out from his Policy will be good enough for his next 2 years (just monthly expenses) .
Is he saving for 25 yrs of his life just to live 2 yrs of good retirement ?
Bhargav , Please share your comments on all these questions asked ? May be we have missed some point you were trying to put.
Disclaimer : All the figures are just to give an idea about the situation and should not be taken as the words on Rock . Things can change according to situations .
5.
Fantastic work Manish,
To answer your comment, only thing I can repeat here is
“it is always a gr8 thing to diversify your saving and distribute your money toward risk free and high return instrument.”
No person can ignore the return generated by MF in long term but at the same time they are risky and by risky it menas that its value can become zero as well(Althogh historically we don’t have such instances yet this is not enough to rule out its possibilities)so always diversify your saving.
the only purpose of my comment is to show my little disagreement toward your view against END plans as when it comes to risk free long term saving investment instrument END plans are also one of the good option.
@Bhargav
I understand your point , I will accept some of your points like :
- Endowment plans are very safe investments
- people should diversify there investment s.
I accept and support both the points , but END policies are not the best thing one can invest for long term DEBT . I would say , investing in PPF is always better than investing in END plans , because of the flexibility PPF would provide.
PPF would score above Endowment in every respect , if its comes to insurance , a TERM plan + PPF combo will still be better than Endowment plan .
anyways .. i understand your point of diversification and investing in Debt .. that is true .
- Manish
Dear Manish
I completely agree with you for Term + SIP
but with TERM + PPF i have some reservations
PPF used to pay 12% interest at one point of time, but now its paying 8% so it would have been incorrect to assume 8% tax free returns year on year.
Now with the direct tax proposal we may have Two PPF accounts
PPF 1 paying taxfree 8% for subscriptions upto 2011 and then PPF 2 paying taxable returns for subscriptions after 2011.
Also
i am not too sure about this but if table 14 pays 6 % + taxfree returns, wouldnt it be prudent to take a policy right now for next 20-25 years and get 6 % tax free returns for all the next 20 years of subscription ?
Would love to have your comments on this
Nikhil
Is table 14 returns going to be tax free ? I dont think so .. all the maturity benefits would be taxable i guess . Anyways . PPF is mainly used for Debt component so that you have some debt exposure with your Equity , IT should not be seen as primary instrument for saving for long term goals .
Manish
Hi Manish,
As per the current tax laws ,maturity from an insurance policy is tax free as in PPF.
Here i am not suggesting that endowment policies are good,but just an information.
Thanks,
Manish
Yup ..
thats the reason why it can be compared to PPF and Equity funds right now , else they might be more bad .
Manish
Nikhil,
I am also holding table 14 from LIC with Anuual premium of 13.5 K,
Problems with Table 14 are
1)As pointed by you it provides a returnof 6%,this is pathetic by any standard.Why not go for PPF which is both sax saving and provides 8%.Even a 2% higher rate can make a huge difference in long term.
2)You have to continiously invest on the fixed date for years,whether or not you have surplus funds to invest.
3)Generally term is 20-30 yrs,which is a VERY high lockin period.Even if you are dying of hunger and you have 2-3 lacs with LIC(having paid LIC hefty premiums for a small coverage) you cannot use that money.And to top it all LIC gives your own money to you on loan at 9% .How ridiculous.
Never ever advocate ANY insurance policy other than TERM to any body.
Insurance shall be taken purely for life coverage needs and not for investment.
Its an incorrect and worst investment product.
Thanks
Doj
Wow .. I like your attitude
… Angry young man 
. its good
Manish
@ mansh
this really is an eye-opener kudos to you manish.
i would request you to give me some suggeston regarding investng my savings
i have just joined my first job after graduating from engg. college. salary 4.5 lacs pa, age-23years
i need to invest somewhere around 60k this year. my requirementss-insurance cover+moderate-high return+some plan taking care of mishaps such as accidents or disability
i am nt willing to pay high sums of money as insurance premiums in the endowment policy.
the other thing is, i would go for an MBA degree in 2-3 yrs. so need to fund my education (to some extent). my father is to retire in 2 years
Hi Manish,
Long time!
Another awesome article and your calculations are spot on.
Its a matter of awareness. If we do not check before we invest, we will be taken for a ride.
@Arun
Hi Arun , you commented after long time. There are many new articles now .
You are totally correct about checking things before we invest . Buyers Beware is the mantra which will drive the indian finance system in next some years .
@Vivek
You need to go for plain term cover + SIP in mutual funds + Health Insurance . Also you should invest in FD's and a small part in balanced funds to fund your MBA in next 3 yrs .
Hi,
I have took 3 ULIPs during 2006.
HDFC Endowment plan with 4.5k quarterly,
METLIFE smart plus with 19.9k per annum,
and Kotak Smart invenstment plan with 2k monthly.
But after after going through one of you article
I am thinking of closing all/some of them &
invest the same in PPF/MF.
And as for as insursance, planning to go for Term Insurance.
Please give your suggestion for the same.
Thanks,
Arun Kumar U S
@arunwave
investing in PPF and MF with term insurance is always advisable .
You can for sure do that . The first 2 you mentioned do not excite me , but the kotak one is ok . You can consider it for long term , but at the end take your call .
Make sure you check the surrender value of your policies
Manish
Hi Manish,
Absolutely great website you have put up. All info is so simply and meaningfully put up.
I agree that endowment policies are a drain on our returns. Needless to say that I have also taken a plunge into the same drain in my earlier days of investing. I have a Jeevan Shree, Jeevan Suraksha (Jun 2002) and one Money back (1996). My annual outgo is around 44K. Have been wondering if I should just close these as money already put in kind of sunk and I need to plan better to maxmise my future returns.
Thanks and Regards
Chakrawarty
@chaks
oops.. that little old polices ..
I am not sure how much tenure is left .. but still you can make them paid up and let the money go in some thing useful from here .
Manish
Hi Manish,
I accidently bumped into your blog and after reading this is deeply distressed.
I have 14 Marriage/Education endowment policies having total annual premium of Rs.3,90,000. I have paid first year premium and now (October) 2nd year premium is due.
So having already Rs.390,000 paid ,please suggest what would be a wise course of action ?
Thanks in advance
S Champakara
@S Champakara
OMG !! .. This is exactly what NRI's do !! .. I suspect you are also working in outside country and have taken these polices for your Child Education/Marriage needs
This was exactly the case of one of my clients . The biggest problem with these polices are that they do not provide required rate of return which you need . Its true that its totally 100% secure , because it comes from GOD company .. But then what do you if it does not meet your expenses at the end when you need .
There may be two issues
- Insurance Cover : You might be underinsured and dont even know how to find out if you really are . Better take pure Term covers and secure your Family future incase you are missing .
- Future Goals : You need to generate good returns on your long term goals without investing in Mutual funds or Equity . So get out of "FD" and those GOD Company "Endowment policies" .. They do dont even beat inflation in long term .
I think your should do your Insurance planning, but full financial planning is advisable . Contact me offline on my email incase you need professional services .
Manish
hi manish,
according to u which is the best health insurance policy with returns for family
hiya manish!! hope you are enjoying your vaccations.. happy diwali.I love the way you break down all the details into tiny little digestible bits. after reading your articles i feel so "knowledgable" and ready to conquer the financial world…but i still need your help in deciding if the 50% increment wala sbi shield policy is any good and also is there any risk if i choose sbi over lic?
@srinivas
You need to look for appropriate policyu as per your needs . try apnainsurance.com
@naz
I am glad you feel so good .
choosing sbi over lic will not create any issue as per my knowledge . LIC is still the most trusted for claim settlement .. For term insurance , every some company is same .
Manish
Hi Manish,
First let me thank you for this excellent article. You are doing a great job educating people like us who knows nothing about investment.
I am also a victim of endowment+money back policies. I have two LIC Jeevan Anand policies(5660 Y , 8050 HY) and one LIC Money Back policy (6600 HY).
First policy is 3 years old and 2nd and 3rd policies are one year old each. I just need your kind advice to get rid of these policies in such a way that it don’t hurt me much.
Regards,
SB.
@SB
Thanks for being a member of Jagoinvestor .
Truly Speaking , its going to hurt you badly . There cant be a best option , the options are limited here .. Here is the best thing you can do
- The one which has completed 3 yrs , Surrender it
- The other two which have completed just 1 yrs . Forget it and make a new start
Mainly contact your LIC agent and tell him you want to do this , Just see what is his reaction and his support . Dont forget for notice how well he tries to brain wash you for not closing the policy , Ask Him two questions
1 . what is the IRR or CAGR return of the policies and how it will help you acheive your financial goal , does the return provided by your LIC policy fight inflation
2. How does the Insurance provided by the Policies help your Dependends after you are gone ? Can it ? go into detail , create a situation and see how that amount is helping you , can it provide current montly income to your family , can it take care of your child education , marriage etc , can it help incase some ciritical emergency happens ?
IF you continue them just because you dont loose out on what you already paid ,, then you will have to stick to it forever and that would be the worst case
Manish
Thanks a lot Manish for your quick reply.
You are very right here and I have to take this tough decision.
I have few more questions and hope you don’t mind answering them.
Now as I need to opt for a Term policy, which one do you think will be a better option from the below two policies listed at LIC website, if I need a cover of 25L ?
1) Anmol Jeevan-I (Minimum Sum Assured – Rs.5,00,000/- , Note : The policy would be issued in multiples of Rs. one lakh for Sum Assured above Rs. five lakh.)
2) Amulya Jeevan-I (Minimum Sum Assured – Rs.25,00,000/- )
Can I discontinue paying premium to these policies anytime I want ?
How about taking 5 Anmol Jeevan policies instead of one Amulya Jeevan policy ? Will this give me more control over my investment ?
Thanks in advance.
SB.
I dont mind answering any questions ever
. thats the reason this blog has close to 2,000 comments and half are my reply 
So I can see that you are die hard fan of LIC
. I say thing because your set of choices are LIC Term Insurance only . I would like to tell you that if you feel that safety is a concern in Insurance sector , get that feeling out of mind, IRDA is doing great job there to make sure every company is Financially sound to make the payments . So issues there ..
LIC premiums are high compared to other alternatives like SBI , Aegon Religare etc . I would recommend you to buy a New Term Insurnace policy from Aegon Religare called “iTerm” . It can be only bought Online . Calculate your Insurance Requirement : http://www.jagoinvestor.com/2008/09/how-to-calculate-insurance-requirement.html
After you calculate your insurance requirement split it into 2 polices and take two seperate term insurance from different companies .
Feel free to ask questions any number of times, just make sure they less than a million qustion .
Manish
.-= Manish´s last blog ..What happens if you stop your ULIPs before 3 years =-.
Its realy disturbing to know that what i did in the past was totaly wrong.
You r so inteligent, surely you have done some course in finance or financial planning,
but i m a doctor, recently startd earning and for obvious reason i did’nt have any damn knowledge abt the commerce, finance and similar things like these,even i dont knw the names. There are a number of people like me who dont know abt the financial planning, abt how to invest, where to invest but still putting their money into these futile products. I m damn sure anybody who has invested in these products when they would know the bitter truth of these products would get dishearten. I m very thankfull to you for letting us know the facts. but tell me wat should i do now. i have an 5 yrs old LIC’s endowment policy (48) which is getting matured after a total of 25 yrs i hv to pay the premium for a total of 20 yrs, the sum assured is 7 lakh.now wat is ur expert opinion abt this plan how much is i m supposed to get after 25 yrs is it useful or simply trash. wat shold i do now . if i surrender it wat would i get in return.please tell……..
Vivek
I am glad you finally realised what you have to do in future . Regarding your LIC policy , you will get SA + Bonus at the end .. which would be 7 lacs + Bonus
lets take Bonus being 100% of SA , you will still get 14 lacs at the end inthe best case .. How what are your yearly expenses today (consider you are married) . I assume 3-3.5 lacs a year (25-30k per month) . With 6% inflation your yearly expenses will jump to 11 lacs a year and you will recieve almost a year worth of expenses of money from your Endowment policy . Now its upon you how you interpret it .. Is it good or is it bad .. that i would leave on you .
Manish
Excellent analysis, Manish. As usual, I must add.
Your clear cut explanations and patient answering makes me feel ’small’ about my knowledge on Insurance.
I have been always against ULIPs since time immemorial. But I never guessed that Endowment policies too are such rip-offs.
Thanks for enlightening and keep up the good work
.-= Srikanth Matrubai´s last blog ..QATAR NEWSPAPER PUBLISHES MY VIEW ON DEBT FUNDS =-.
Great ..
Nice to know you like it so much
I saw your blog , are you advicing in bangalore ? We can catch up sometimes , I hope you will answer other teaders and help them in future .. great to have you here .
Manish
Hi Manish,
lease clarify:
I am a new user here. I just have basic doubt
My LIC Endowment policy detail:
Tenure 15:
SA: 3Lacs
Premium: 20303
With the assumption of 48/1000 bonus and FAB of 500/1000, my maturity value come around 6.6Lacs: {48*(300000/1000)*15+3Lacs(SA)+(500/1000)*3Lacs} : i.e 216000+3Lacs+150000=6.66Lacs
However, If I put the same amount (premium of 20300) for 15 years in pure PPF,at the end of 15 years, I could get an amount of Rs 595,283. i.e 5.95 Lacs which is less than LIC’s maturity value.
I used the PPF online calculator in this link (http://www.personalfn.com/tax/calc/ppf.asp).
Where am I wrong here?. Do I need to calculate using Anuity formula?
If not, surrendering endowment policy and then taking new term policy and PPF combination may not be better option.I can just add another term policy instead of surrendering this LIC policy.Please guide me.
Ningthem
Who gave you the assumptions of 48/1000 and 500/1000 . Are they average cases ? If yes , then ya , It would beat plain PPF .
But , having said that You also have to look at other things . not just returns . With PPF option . you have other advantages like
1. Early partical withdrawals (in LIC you can take just loan anf you have to pay interest)
2. You can reduce your contribution and pay just 500 . incase some day you dont have much money . With LIC policy it will be missing .
You have to consider liquidity and flexibity too with your investment product .
Apart from this , because the term is 15 yrs . Just plain PPF is not recommended . you should be using Equity for 15 yrs and you can assume 12% return from it at the minimum . In that case you will have 8.47 lacs .
>>> 20300 * (1.12)*((1.12)**15 -1)/.12
847591.5925205684
Comments ?
Manish
Hi Manish,
Thanks for your explaination and pointing out the benefits of PPF.
I was using Bhargav comment dated “October 31, 2008 at 10:31 pm” in this article for bunus (48/1000) and FAB (500/1000). Assuming bonus of 48/1000 was wrong for my case (term 15 years).When I see the bonus information from LIC website http://www.licindia.in/bonus_info.htm#5 , the average bonus for 11-to-15 years term is Rs 38/1000 for past 3-4 years. Not sure about the FAB( could not open the link).
So, if I take bonus of 38/1000 and FAB 500/1000, it still comes around 6.21 Lacs at the end of 15 Year which is still above PPF value (5.95Lacs).
If I can get the average FAB for 11-15 yrs term , I could get the right calculation.
Coming beck to the question “Does it make sense to discontinue my policy (details mentioned above)and go for PPF +Term “, I am still confused.
I am not considering the Term+MF (“Equity for 15 yrs” as you mentioned) at this time.
With the above calculation I am still feeling that ,instead of surrendering the existing LIC policy,taking another term insurance above this LIC policy would be better option for me.
Manish, I need your comment.
Ningthem
Lets take that the calculation you have done are final .
You will get 26k more in LIC policy than a PPF plan . From return potential you are correct . But now, you are exposed to some risks which you should understand and accept .
1. You dont have much flexibility to withdraw from money from your LIC policy in between (PPF also has issues)
2. You cant reduce the contribution in LIC (PPF you can)
3. If you go with PPF , even the rate for that can come down or go up .
So , once you know and understand all of these , then you can take the decision which suits you . Your idea of taking a term plan over LIC looks good .
Manish
Hi Manish,
This helps.
Thanks a ton for helping so many people including me like this.
Please keep doing good work. I really like many articles you wrote and really appreciate. I will come beck with some more queries on different/similar topics seeking your help. For the time being -bye.
Ningthem
Sure .. just mail me or start a thread on forum
Manish
Hi Manish ,
This is my first query need your help to check if i have invested rightly.
1. HDFC young star 30000/annum for my 2yr old baby
2. SBI Shield :9500/annum for 25lac coverage for myself, @ 5%increase/annum scheme
3. SBI ULIP III in my spouse name – @24K/yr lockin 5yrs which gives 480000 insurance cover.
4. Also i had invested around 30k in 4 different company SIP’s which i have stopped.
5. Reliance natural resources & Diversified petroleum : 15k + 15k around 3yrs back.
6. Reliance power IPO around 4k which not going anywhere.
Please advise if i need to change any othese.
Regards
Sunil
Sunil
1. As far as you can manage your ULIP well and do switching at right time, you will good condition . If you just want to sit back and do nothing then its not a right product , in that case a simple SIP in MF was a better choice .
2. Good one .
3. Same as 1
4. You mean different MF’s ?
5. Check your returns if its more than 20% , get out and better invest in diversified funds .. These are sectoral funds .. Are you ok with them ?
6. Investing in IPO does not mean sticking with it . I also bought this same thing , now I am out . If one does not know stock trading , there is no reason to trade in short term . there are better stocks for long term .
manish
Hi,
Please give ur reviews on Jeevan Surabhi of LIC which is mone back plan from LIC
Krishna
Right now its not possible to give full review , but if its endowment or money back plan then mostly its return would be in range of 5-6% max . You can try to calculate the IRR of the policy and see .
Manish
Manish
Jeevan Surabhi is money back plan i have paid the 1st premium 32161/year. Do you advice me to stick with it for 3 more years ? beforfe surrendering it
Krishna
You will get 30% of the amount after 3 yrs , so loosing 32k now or paying 96k and getting back 32k back after 3 yrs .. What do you think is a better choice
Manish
Again the Money may be taxed after the new tax code.I am confused how to build the corpus for my daughters education, marriage , and also for my retirement. I have two ELSS Funds HDFC TAX Saver and Canara Robeco. Are they good funds.Can you please guide me
Krishna
Both of them are good funds .. regarding New tax code .. its better that let it get confirmed and then think about it .. for now just go with the flow . Even if it comes into the action , you will save more money every year in tax and have more investible surplus .
Manish
Hi Manish, Just came across this blog and found it very informative and making me re-think just as am about to sign up a LIC policy. I hope to seek your advice if am making the right decision.
Plan – Jeevan Shree 1
Sum Assured – 50Lakhs
Yearly premium – Rs 4.87 Lakhs
Number of years to Pay: 10 years
Maturity of policy at the end of 15 years
Maturity amount: Rs 1.24 Cr
Compounding on a year on year basis, its seems to pay off at approx 9% PA. Would you recommend this policy? Or do you think there any short comings?
There are other choices for timelines including a 10 year, 20 year and a 25 year maturity times. Would any one be better than another ? I’m 30 yrs old.
Kiran
the first point is regarding Maturity amount of 1.24 crores , Is it indicative or is it guaranteed ? Check the documents and ask the agent . I am not sure if its guaranteed . They give illustrations on different interest rates of 6% and 10% .
You can look at mutual funds as options or ETF’s . Mainly it should be equity , LIC returns generally do not go past 6% . check your policy numbers and the promises once again .
Better look for your life cover once again .
manish
You are right. Its variable and can change. The agent misguided with bloated figures until I verified it with documentation. Guarenteed figures are much lower. About 80 Lakh maturity on a 50 Lakh policy at the end of 15 years.
Now you recommend MF and ETF. I do not live in India. Could you please suggest a way for me to do this ? Could it be done online ? Do you do financial counselling ?
Kiran
I knew it .. 80 lacs maturity on 50 lacs policy is not a big deal , even Bank FD will beat it . . Do you have any trading account with Bank like ICICI or HDFC who deal in mutual funds , you can buy them online . Not an issue
.
Or next time when you come india , open one or start an SIP with ECS to bank where you have an indian account .
I do financial planning , mail me .
Manish
Manish,
Also what about Kisan Vikas Patra from Post office which works about 8.4% p.a and money doubles on 8 years and 7 months. I feel this is better than PPF also less lockin period about 2 and half years. Comments on this ………
Krishna
KVP has other issues like interest in taxable and no partial maturity . With PPF you can withdraw partially atleast. money doubling in 8 yr and 7 month is not a big deal .. it does not even translate to 6-7% return .
Manish
dear manish,
I have 2 policies-Jeevan Shri &Money back(both 20 years).The premia are 10,868 & 5,667.Policies are about 9 years old.My age is 54 yrs.Should I continue these policies or go for a surrender ?Pl advise me with illustrations because my earnings are uncertain and like others mine is a agent-trap case.
Bhaskar
You should surrender the policies and try to invest the money in equities for long term , see http://www.jagoinvestor.com/2009/10/what-to-get-rid-of-your-junk-insurance.html
Manish
Hi Manish,
I have invested in endowment policy for term 10 years, plan 14. SA= 600000, premium quarterly = 63800/- I started in Nov’2000 and Nov’2010 is maturity. i know its too late to decide for closure and better wait for maturity. But quetion is how much i can get returns?
What ploicy is the best to invest the return amount. Also, effective apr,2011 all returns from LIC, PPF will be considered as EET i.e. return will be taxed after maturity. `
Thanks,
Shetty
Manish,
premium is quarterly 15,920/- not 63,800/- as mentioned in previous comment
~Shetty
Shetty
In 10 years you will pay 6.38 lacs and considering you get 10 lacs return , its not more than 5-6% return in 10 yrs . So from return point , its not a good choice .
Regarding EET of PPF , LIC and all , i would not like to comment right now as its still not confirmed and yet to become a law
Manish
Hi Manish,
Just a little confusion on the Term Insurance claim and eligibility.
When I inquire about eligibility for religare iTerm policy here is what they say:
=====My Mail================
Hi Sir/Madam,
I am looking for an iTerm term policy and wanted to buy online. However before proceeding , I would like to know your answers for the following question I have.
1. I am from Imphal and my parents and other family members are in Manipur state. I am currently staying at Bangalore (which is covered location in your website) and working as software professional.
Can I take this policy though I am basically from Manipur state, which is not listed as of now for this policy in your website ?
2. In case of claim , how is going to be dealt?. Won’t you need my permanent address . If so where do I mentioned that while buying this product?
Please let me know your answers.
Thanks and regards
Ningthem
==================This is what they reply=========
Dear Mr. Ningthem,
Thank you for writing to AEGON Religare life insurance.
Currently ITERM Plan can be opted by the customer who resides in the cities which are listed on the website. We would like to inform you that our services are only available for the list of cities that are mentioned in the website. In case we launch the same in your city (Manipur) you will be intimated.
We are looking forward to be operational at other cities as well in the near future and would update the same in website when functional.
Incase of any further information required please feel free to call on our Toll Free number 1-800-209-9090 Monday to Sunday between 08:00 am till 08:30pm OR write to us at customer.care@aegonreligare.com or visit our website at http://www.aegonreligare.com.
Regards,
Executive- Service Delivery
AEGON Religare Life Insurance Company Limited
“We are committed to provide the best customer service experience in Insurance Industry”
========
This means that I can not get this policy as my state is not listed/covered.
Doe this apply to other Insurance also? If so, I already have 2-3 ULIPs from ICICI which has some insurance cover. neither they (Agents) ask my native state nor do I. How are these insurance dealt with this scenario?
Comment please manish!
Thanks
Ningthem
Ningthem
Regarding other insurance policies , Its not like that . Most of the other companies have wide cover . AR is a new one and is totally online so it cant cover all the cities . Regarding your case , its still not clear if you will get it or not , because they said that only people who are residing in the cities they cover are covered .
So you are residing in the city which they cover . So you should get it .
manish
Hi Manish,
Your articles are excellent, i do read all of your articles without missing anyone.
I would like to ask you one thing.
I am just started investing 25K per year for 5 years in ICICI Prudential Life (LifeStage Assure Pension Plan), in this as ICICI executive told me that 5 years is the locking period.
Could you please suggest on this whether it is good or not
Right now i dont have any kind of insurance, So I am planning to take Term Life Insurance by reading all of your articles.
I am earning 30000 per month and my age is 23
Could you please suggest me which is Term Polocy suits to me.
I will be waiting for your reply.
Thanks,
Mohan K
Mohan
regarding the policy from ICICI , its the same kind of ULIP like other . I dont think if it fits you . Regarding 5 yrs lockin did you check the policy document ?
term insurance you can take anyone which is the cheapest one . See apnainsurance.com
manish
Hi,
Can you help?
I am investing 14k per annum in LIC jeevan anand….it is for 16 yrs…….and i would get 4Lakh at the end of tenure….plus a life long coverage of 2 lakh…is it right option?
Jeevan anand
Nag
Your IRR comes to around 6.5%
>>> r=.065
>>> 14000 * (1+r)* ((1+r) ** 16 – 1)/r
398902.2941441625
Is it the right option ? Its you , who have to answer if you are satisfied with 6.5% return in 16 yrs in a environment where 16 yrs return come out to be in range of 12-20% from equity , which would have made your 14k payment per year into anywhere from 7-14 lacs range instead of 4 lacs .
Manish
Manish,
What about Chit funds.How profitable are they if you go with Govt Organised Chit companies.
Krishna
I dont think chit funds are of much use and worth . They are mainly a convinience tool rahter than growth tool .
Manish
just amazing sincerity with which you are responding to people’s queries….i recently read the forbes india dec 09 issue, where they had a good article about all these fundas and just amazed how beautifully you have explained with data that term policy is a must have in one’s portfolio and rest of the money you can invest in better plans….
Sandeep
Thanks
, are you following this strategy of Term + MF ?
Manish
I follow your blog via email subscription.
Is there a risk in investing all money with one fund house. I have often wondered and I like to ask your view. What if I take term insurance from say LIC and invest all money with say HDFC MF( 50% in Top200, 25% in Prudence and 25% in Mid-cap)?
I have heard something like FUND HOUSE risk but what is it really? And incase of the New Pension Scheme (NPS) you actually have to opt for one fund house!!
Rocky
Thanks
Investing all in a single fund does not have much risk , but from the view of diversification in risk , we can invest in more than 1 fund house , here the risk is not about return , its about secure hands .
Manish
Hi Manish, Happy Holi
First of all Hats Off to you!
1) My age is 29, i want to take Term insurance Amulya jeevan 25 lacs (35 yrs), at what
age i should go for 30, 35, etc.. ? to get max advantage.
2) As you have already said 2 term insurance diversified, what is the advantage ?
when compared to my first point.
3) I want to invest 2-3 MF-SIP diversified of 1000/month, can you please throw some
light on this. Can i invest those SIP’s blindly for 15 years ? or it should be less say
3/5/10 years.
4) I have plans to take jeevan anand 5 lacs S.A 20 years , on maturity will i get 15 Lacs,
i.e 10 Lacs more (bonus + Loyalty), can you please confirm whether the agent is
correct?
5) Can you please guide me on Medical Insurance.
Krishna
thanks for your comment
1) Take it NOW !! , you never wait for Life insurance if you NEED it . Just imagine if you wait for some time to get “MAX ADVANTAGE” and in between you are dead , then ?
2) We divide the insurance in 2 so that we have flexibility to reduce it later : http://www.jagoinvestor.com/2008/11/we-will-today-discuss-some-of-best.html
3) invest in funds from http://www.jagoinvestor.com/2009/08/list-of-best-equity-diversified-mutual.html , you never invest “blindly” ever . But you can invest with a long term horizon in mind and do less work , do an yearly review and see how the funds are performing at that time , if they are not , get rid of them and add new .
4) Dont take it , you have better choices , invest in MF + ETF + Index Funds + PPF + NPS , no endowment policies please : http://www.jagoinvestor.com/2008/10/why-endowment-policy-are-never-best_08.html
5) What kind of Guidance are you looking for ? see : http://www.jagoinvestor.com/2010/01/introduction-to-health-insurance-in-india.html
manish
Hi Manish
Thanks for the enlightment
A small query………I had taken LIC Endowment assurance policy ( T. no. 14) for 20 yrs period in 2005. After reading ur views I have made my mind to stop payment of premium. I have so far paid 1.1 lakh Rs for this policy so far but I am not exactly sure about what happens to this existing “investment” done.
My policy commencement date : 28th Aug’2005
Sum assured : 5,00,000
Premium : 12,247 ( Half yearly ) ie 24,494 yearly
Also I see something called as Accurred bonus of Rs 83,000 in policy details. What is this ?
LIC website says the following regarding Premium Stoppage:
“If payment of premiums ceases after at least THREE years’ premiums have been paid , a free paid-up policy for a reduced sum assured will be automatically secured provided the reduced sum assured, exclusive of any attached bonus, is not less than Rs. 250/-. The reduced sum assured will become payable on the event as stipulated in the policy. ”
What does the above staement mean ? Does this mean I can now stop payment of premium without worry and invest the money in better instruments ?
Roop5
Making it paid up means , you will get insurance cover for 1 more year and what ever is your current value of investment (after making it paid up , there is a way to calculate it) , you will get it at maturity . Surrendering means getting the money now !! . but it would be very less .. This is the problem with endowment plans ,the trap factor is pretty strong !!
Manish
how do i calculate the paid up value of the policy ?
basically I am wondering should I continue paying the premium or not. Whats ur advice ?
Decision would be basis the return on 1.1 lakh that I have invested
Hi
I have also got insurance cover via my employer . It includes health as well as accident insurance . Does this mean I should not go in for a term insurance of my own ?
Roop5
You should go for term insurance , your employer only covers for health and accidental , what if you are dead tomm
make sure you have financial dependents
Manish
I have dependents ( parents + wife ) . May be a kid in next 1-2 yrs
Otherwise my company gives following insurances
1) Group Term Life Insurance (Employee Deposit Linked Insurance ) (1.4 lakh)
2) Group Personal Accident Insurance (Roughly 60 lakh ) :B
3) Group Term Life Insurance (future service liability) (3.5 lakh)
4) Group Mediclaim Insurance ( 4 lakh family floater)
What is the difference between above no.1 and no.3. Does this exclude general insurance ?
also you did not tell about accural bonus of 83k . What is this ?
No idea on this ..
anyone ?
nice FAQ page
http://www.insuremagic.com/Content/FAQs/Life/faqs.asp
also found how to calculate paid up value of my policy
Manish,
Great forum and very informative. Thanks for your contribution to this topic. I just paid my 4th yearly premium (out of 16 yearly installments) for the Jeevan Anand policy with a Sum Assured of 24,50,000 + whatever additional bonus on maturity and again the SA on death i believe. As I realized I was only getting a maximum average return of 6.5%, I decided to get out of paying further premiums. I paid close to 1.75 lakhs annual premium for the last 4 years and I dont want to lose 70% of its value by surrendering the policy. So my next best alternative is to convert it to a paid up one. For the last 3 yrs the avg bonus payment was about 41/1000. I understand since i paid 25% of the total payments my SA will be reduced to 25% of 24.5 lakhs. So at the end of maturity what will be my payout? Will the payout include any bonus and other components? Will my beneficiaries still get the second payment on my death (hopefully its not for a long while). Appreciate your comments.
PS: I will make other arrangements for my life insurance and investments.
In 2006 i had taken a LIC endowment policy (T14) for sum assured of 500000. Premium is 18851, payable yearly. I have paid 4 premiums till date and the next is due at 26th March 2010. I checked the policy details online and here goes the details–
Commencement date: 26/03/2006
Sum assured : Rs 500000
POlicy term: 25 years
Accrued Bonus till date: Rs 95000
Now i am in doubt about the Rs 95000. The figure seems decent to me. Should i continue this or surrender the policy. The surrender value is coming at Rs 37000. The policy is paid up (showing 80000). Please help.
Hi Manish,
In the link provided by Roop5 they have mentioned that :
“LIC will not issue a fresh policy for at least 3 years in case an earlier policy of yours stands lapsed or was converted into a paid-up one.”
So does that mean that we can’t take LIC’s term plan once we surrender or make our existing policies paid-up?
Thanks & regards,
SB.