Jagoinvestor

February 22, 2008

Life insurance is an Insurance product not an Investment product – Indian people’s mindset about life insurance

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.

life insurance

Common people’s mindset about life 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 for life insurance.

Watch this video to know the difference between life insurance and term insurance:

Case Study
——————-

Rajesh is a salaried person with a salary of around Rs 20000 per month, He has 2-3 dependents like his parents and wife.

Rajesh can afford a maximum of 10% of his salary as an 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 a 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 has 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.
  • This 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 problems if he would have taken 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 the next 20 years through SIP every month or yearly lump sum.

Equities in long term outperform all the investment options, In the last 10 years HDFC tax saver 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 the 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 is 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.

Don’t 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.

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HMT
HMT
7 years ago

Hi Manish, do you have an article or discussed these topics?
1. Is Life insurance provided by employer enough?
2. If not then should I buy the additional life cover from the employer (as its cheap) or from third party?

Thanks,
H

Prashant
Prashant
7 years ago

This is really a great article. I like the way you explained with an example.

Thanks

Saket
Saket
9 years ago

Hi Manish,

Recently I got to know about SBI Life – Smart Wealth Builder plan. SBI is promoting it by saying it is much better that PPF. Interest Rate is 9.2%.

Please suggest if the plan is actually better than PPF. Also please share it’s positive & negative points.

Thanks.

Saket
Saket
9 years ago

Hi Manish,
Thanks for such a great article.
I have taken the LIC Jeevan Anand plan and pay Rs.30,000 annually as premium.I have paid 4 premiums till date. The term is for 25 years. As its giving less returns, I want to surrender the policy and want to get a Term Insurance.

Please tell me how much money will I get if I surrender it? Is it a better to surrender it or should just stop paying premiums and get the total amount on maturity?

Thanks.

Saket
Saket
Reply to  Jagoinvestor
9 years ago

I have taken Income Tax benifits for last 4 years on those premiums. Do I have to pay tax for last 4 years? or will it be exempted?

Thanks.

Saket
Saket
Reply to  Jagoinvestor
9 years ago

Thanks Manish.

S.Muneshwar
S.Muneshwar
10 years ago

Hi manish !

I am retired in Nov_2013 . Now got lumpsum amount as retirement money.

I invested 25lacs in pension plan Jeevan Akshay for regular income for me.

still I have to pay 2lacs rupees as income tax.

Please suggest any ways to save that huge amount.
I want to plan for LIC arogya as mediclaim policy.
Apart from this any other investment that I can do ?

Regards,
S Muneshwar

S.Muneshwar
S.Muneshwar
Reply to  Jagoinvestor
10 years ago

Dear Manish,

NO ! please suggests any better options which save my tax & also have any mediclaim policy (which is require in this phase).

Regards,
S Muneshwar

S Muneshwar
S Muneshwar
Reply to  Jagoinvestor
10 years ago

Dear Manish ,

Is there any other section, under which I can save my tax of Rs. 2lacs,
like donation of anything else.?

Regards,
S Muneshwar

Birender Kumar
Birender Kumar
Reply to  Jagoinvestor
10 years ago

Pension plans will always attract tax as it is taken as income earned. Here you can use multiple endowment plan as pension plan. As life insurance maturity amount is exempted out of tax. I am sure Manish can put more light on the same.

rahelkale
rahelkale
10 years ago

Hi,

I wanted your suggestion on my current investments.
I am a single female with no depedants as such.My parents are retired and pensioneers.

I have invested in the following:

1.Term Insurance -LIC Jeevan amulya 40 lakhs.(For life cover ,i know this is not an investment option).
2.PPF -around 60k ( i am looking at this as a pension plan).
3.NSC -Around 10k.

Do these investments look fine in terms of the cover i need as of now.Could you suggest any other schemes where there is little risk as my risk appetite is not much.

Regards,
Rahel.

gupta
gupta
10 years ago

Very nice
Got a clear idea about the insurance

Thank you
Jago investor team

Winston
Winston
10 years ago

Good article, gives me a clear cut idea about insurance policies.
Thank You!

Chakra
Chakra
11 years ago

I am 39 years old, planning to take 25 yrs term policy for 2 crore.
Should I go for one policy with one company OR split the amount among 2 insurance companies for 1 crore each. Which option is better.

I am thinking about HDFCClick2Protect for one policy. Can you please suggest another reliable company for remaining 1 crore.

Dishant Verma
Dishant Verma
11 years ago

How 15000/= per year would become 16 lakhs after 20 year with 15 % Rate , could u please explain ?

Sharath Mascarenhas
Sharath Mascarenhas
Reply to  Dishant Verma
11 years ago

Dishant,

You could google for any of the compounding calculators. Some of them could show an explanation as well.

Chetan
Chetan
11 years ago

Manish,

Really a very nice article. My family looks at insurance like investment and my mom forced me to “invest” in LIC insurance. Its been just 1 year so I am planning to cancel it and go for term insurance. This article is really an eye-opener on how to look at insurance plans.

Thanks,
Chetan

Anand Deshpande
Anand Deshpande
11 years ago

Dear Manish,

Thanks for such a informative article, by reading this I change my mind from Jeevan Tarang to Term Insurance + PPF.

Sharath Mascarenhas
Sharath Mascarenhas
Reply to  Anand Deshpande
11 years ago

Anand,

Good move with the Term Insurance + PPF.
However, it would pay off to look at other alternatives that could a better return with better flexibility options.

However, if you are more risk averse, then I recommend that you can invest in a debt base mutual fund. As & when you get a little more savvy with finances, you can use the money accumulated in the debt funds to yield better returns in other products as there’s no lock in of any kind on these instruments. But do keep in mind the taxation angle of these instruments

Sharath Mascarenhas
Sharath Mascarenhas
Reply to  Anand Deshpande
11 years ago

Anand,

Good move with the Term Insurance + PPF.
However, it would pay off to look at other alternatives that could a better return with better flexibility options.

However, if you are more risk averse, then I recommend that you can invest in a debt base mutual fund. As & when you get a little more savvy with finances, you can use the money accumulated in the debt funds to yield better returns in other products as there’s no lock in of any kind on these instruments. But do keep in mind the taxation angle of these instruments

Pratik
Pratik
11 years ago

Liked this line v.v.much – “Don’t see what it takes from you , see what it gives you.”

kreesna
kreesna
11 years ago

Hi Manish,

Thank you for the well written article about life insurance. It cleared up quite a few doubts that were in my mind.

trackback
13 years ago

[…] : For term insurance , the return will be the max amount you can get and Risk would be amount you can loose all , which […]

namasivayam
namasivayam
13 years ago

hi,
i want to know about jeevan rekha policy. currently that policy is alive or not.

mukesh lakhani
mukesh lakhani
14 years ago

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

Sharath Mascarenhas
Sharath Mascarenhas
Reply to  mukesh lakhani
11 years ago

Hey Mukesh,

Not sure if this response will help but what we need to focus on is the return as against the product. Here’s another way of looking at the Term Plan + MF option…

Say after about 5 years or so, you get an opportunity to invest in a property which is a steal & you know for a fact that the value of the property will double in the next five years, you could always dig into the savings made in the form SIP (which wouldn’t be the case if you opted for an endowment plan).

Also, there’s a good chance that the property deal would yield much higher returns in a shorter span of time…

Nonetheless, the important aspect to focus on is ROI you need to yield year. Are you contended with a 10%, 12% or 20% ROI & then choose the investment vehicle accordingly.

Regards,

Mukesh Lakhani
Mukesh Lakhani
14 years ago

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 Lakhani
Mukesh Lakhani
14 years ago

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

SJDate
SJDate
14 years ago

@ 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.