I would like to thank Mr Bhargav , to comment over my article http://finance-and-investing.blogspot.com/2008/10/why-endowment-policy-are-never-best_08.html (Comment 11) and raise some questions , which gives us an opportunity to look over it once again and i hope for the final time , I hope after this article i don’t write more on Endowment policy more .
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Comment from Mr Bhargav
I have commented back to Mr. Bhargav , lets see the reply once again here in little detail and with extra comments .
This was my comment back to him :
The example which i gave in my article was from one of my friends who took some policy 5-6 yrs ago.
Lets leave that example aside and take your example ( http://lifeinsureinfo.blogspot.com/2008/07/endowment-with-profitplan-no-14.html ) and discuss it .
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 believe it will return 15% + at least …
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 believe at least 20k , 30 yr person will be married and will have kids probably , if not now than after some years . At least 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 ?
Mr. 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 .
Summary and Conclusion
In life , people make mistakes all life , they may feel something is good and there may be others who make them feel this because of there ignorance , unability to have an insight about something . In India , same thing has happened in Insurance Sector . People are never told what is Insurance ? Whats is its importance ? How to calculate it ? All there life Insurance is seen as investment product in India , our parents , Grand parents and other relatives have done this all over there life and they will not understand why its bad , because 90% of India does it . 90% people doing it does not make it correct . What can be done if there was “Mass fooling” done in our country .
Its never late if we young generation understand and try to see things logically . Endowment policies always remind me of this saying “Common sense is not common” . In India thats very true when it comes to Endowment Policy .
Again , this is my attempt to create awareness on this issue , if people still disagree and want to go there way, its there wish , i have done my job and may be i should call “Social Responsibility” .
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.