Jagoinvestor

June 24, 2008

All you want to know about Term insurance and Endowment policies with suitable examples

One of my good friend had a small argument with me, that she would not invest in Term Insurance, because she will not get any “returns” out of it. I believe investing in a term plan looked a very unprofitable thing to her as she never gets back the money she paid as “premiums”, if she survives.

Endowment plans looked nice to her, because they provide money if you are dead and even if you survive. You get back money as the prize for not dying !!!.

term insurance

 

With respect to Term insurance, she understood the fact that her family will get the money from insurance company in case of her death, but she was concentrating on the fact that she would not get back anything if she survives.

What is the return in that case? Nothing !!! and looked like some one is fooling you with a product called “Term Insurance”, where you are “investing” premiums to get nothing at the end.

Let me now tell why this happens and some give you some insight on this matter.

I have already talked earlier in my last post “Life Insurance and how to go about it”, about Term Insurance. Let me now take more deep dive into it and talk about the reasoning part.

I will first talk about fundamentals of Insurance and then talk about Endowment Policies and why are they popular, and what people don’t realize about them. and how Term insurance is the right thing for most of the people.

Basics of Life Insurance

What happens in a average family :

There is someone who earns and his family comprises of wife, kids, parents. if not all there is a subset of these family members. The head of the family earns and his family lives happily. All the expenses are met from the earnings of this main member, most of the time the husband. Now consider this person dies in an accident or for that matter because of any event.

What happens?

What happens to his family members other than the psychological trauma. If they don’t have money to take care for them selves, either some one from family have to take up the job and start working which may not be possible for them, or They have to decrease their standard of life to maintain the expenses.

They are now totally unsecured from future’s point of view. In short they are totally messed up, which should not have happened. I gave this detailed explanation for the circumstances because i wanted you to understand how bad can happen and proper measures must be taken care for this.

What is the Solution?

Adequate Coverage !!! this cant be compromised… You must have a backup plan which can give your family the same kind of income which confirms that they are not short of money in case the main earner is gone. If there are some debts like Home Loan, or any other tasks which need money apart from regular income, the cover must be good enough to cover that too..

why it is necessary to buy life insurance

For example :

Robert has a family expenses of 25,000 per month and there is a Home loan of Rs.25 lacs to be paid within 10 yrs. He is 27 yrs old. He has a wife, 2 kids and parents. All of them are dependent on him financially. He has investments of 5 lacs. Now in this case. In case he dies, who will take care of Home loan, how will provide them enough money to live life comfortably. They need 25k * 12 = 3 lacs per year.

Which they can get per month if they have 35-40 Lacs of money. If they put this in bank, they will get Rs.25,000 per month as interest which they can use. Considering inflation it will not be enough after some years, but lets leave it now for this example.

Add home loan of 25 lacs to this 40 lacs and what we come to know is that this family must be covered with minimum Rs 65 lacs . Rs 75-80 Lacs is a decent cover for this family. Now if he takes a cover of 80 lacs for his family, from that day he can happily live all his life without any tension , thinking what will happen if he is not there.

He will be attain peace of mind , and not be worried for it.

He must get a lot of internal peace because his Family is protected with a good enough cover to take care for them. And this is what you get in “return” from Insurance. No monitory return can give you more satisfaction than peace of mind.

So before doing anything else, his first step is to give adequate cover to his family and that’s the most important responsibility for him as a Husband, Father, Son. He must understand that this is not an investment for monitory benefit later in his life, but its for his family happiness and future.

Life insurance under MWP act is also one of the better option for married man. One point to remember and not forget is that this is the minimum cover required for family and anything less than this will be taking risk with family future.

Endowment or Money back Policies

Lets discuss the problems with these plans with respect to the above example.

High Premium : For an 80 lacs cover for say 30 yrs, the premium payable will be At least 2-2.5 lacs/year (this is a conservative figure). So now premium so high is not possible for anyone like Robert, so what they do?

They go with a kind of cover for which they can pay premium easily, can then they take cover for 5 lacs, 10 lacs or maximum 20 lacs. And guess who suffers in case of his death : HIS LOVED ONE’s.

It might also happen that they are compromising on a lot of small things which are important at that moment in time, like buying a bike for son, which they cant buy because of the insurance they have to premium, or some vacation they could have gone to with family, but compromise on that because of premium.

Money back at the end of the maturity is like a penny after so many years :

This is some thing most of the people overlook. They just see the numbers, 5 lacs 10 lacs or 20 lacs. And at the time of taking Insurance it looks good figure to them, because they see numbers, they dont see its value after many years, They don’t consider Inflation into account.

In case of above example, if Robert takes a cover of 15 lacs by money back policy, what happens if he survives the tenure. He gets 15 lacs at the end, Great Money after 30 yrs. Isn’t !!!

Lets see how great this money is? His monthly expenses will grow from 25,000 per month to 1.5 lacs per month (considering inflation of 6%). Now this money will help him survive for not more than 10 months … For so many years he pays high premium each year, just to get back money to cover his 10 months monthly expenses? What the hell !!!

Under Insurance :

Because of the fact that people want money back on survival and because of high premium, people end up taking policy for which they have to pay premium under there budget, which means less cover.

Without realizing the fact that they are highly under insured, the reason for this is that they see Insurance as investment product and not a protection cover for there family. When they die, there family get the money from Insurance company, but most of the time its not enough for them and it erodes very soon.

Term Insurance Policies

Lets discuss the features of Term Policies with respect to above example.

Cheap Premium : The premium is very low for Term insurance Policies. For above example. The yearly premium for Rs.75 lacs cover for 25 yrs is just Rs.20,000 yearly or just 1,600 per month !!! .

This is in any way affordable for most of the people. Its providing the fundamental requirement of Good cover and low premium and if you think of returns, Good cover and low premium can themselves be seen as good enough return. You family protection at low cost is the return you get.

Watch this video to learn more about Term insurance and it’s benefits :

Opportunity to invest rest of the money in High return Investments :

With term Insurance you save a lot of money in premium and now you can invest this money as per your wish in high return instruments, anyways in Endowment policies you put money for long term and you get it after so long time. So you can now always put your saved money in things which are long term investment products and return great returns.

One of those things is Equity Diversified Mutual funds and Direct Equity (depending on persons ability and interest). In long term Equity Diversified gives fabulous returns (15-20 yrs) and the risk is minimized because of long term.

And if you consider India growth story , it looks great in long term , hence Equities for long term is the most obvious choice. They will give you return of 15%+ CAGR. (15-20 yrs)

Also it will be flexible , you can not invest for a year or two, if you want to use the money for your family vacation or some important event.

Conclusion :

Insurance is not an investment product, its a Protection instrument for your Family or any one your want to cover. There are other products for your investments.

Let your finances be the way you want your life to be , SIMPLE !!!

Don’t mix Insurance and Investments. There are products like ULIPS(What are ULIPS) and Endowment or Money Back policies which never excited me. They complicate things, confuse people. They can be good if you understand how to make most out of it, but it require knowledge and expertise. They offer some flexibilities, but still they are not worth it.

Read more on Term Insurance at my Old article. I would be happy to read your comments or disagreement on any topic. Please leave a comment.

Disclaimer: All the opinions are personal and shall be taken as knowledge sharing and not as encouragement

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Blogger of the Fortnight: Manish Chauhan | Indian Social Media Landscape
8 years ago

[…] Importance of Life Insurance […]

Jyoti Singh
Jyoti Singh
9 years ago

Hi Manish, I was surfing about term policy verses any other endowment policy and found your blog. I must thank you for your valuable comments and truly eye opener.
I’m 39 year working professional, my spouse is 43 years working in a private firm and we have a daughter of 17 year. Unfortunately I have never invested in any life covering policies. We’ve few SIPs all put together around 7k each (self and my hubby) month investment. After reading your blog I could understand the importance of term policy. Now please suggest us which policy from which insurance company is best for both of us. Which covers us 1crore each with less premium. I’m really worried about this now and I know we are really late here. Please help us. Your suggestion and guidance would be highly appreciated. Thank you Jyoti

Policy x
Policy x
10 years ago

Very informative post. Life insurance is very much mandatory. I would like to suggest on my behalf to compare the policy before purchasing it.. By comparing one can select the best option as per their requirements at reasonable premium and be saved from fake commitments. Here are some websites from where one can compare. http://www.policyx.com/ , policy bazaar,policy mantra..
Thank you

Deepak
Deepak
10 years ago

Hello Manish,
Nice post. I have been reading your articles for an entire day now and continuing….

I recently took 4 LIC policies:
1. Jeevan Anand for self and wife for 5 L each , 20Yrs, and paying 4K monthly premium
2. Jeevan Tarang for self and wife for 5L each, 15 and 20 yrs and paying 4K monthly premium.

I was lured by the LIC agent stating the policies are retiring and these are the best policies.

But after reading the Jeevan Tarang review and other posts, I have realised that I have done a mistake but fortunately I haven’t received the policy documents yet.

I wanted to know if the cooling period is calculated from the day of first premium or the policy print date?

Also I am planning to invest in HDFC click to Protect term plan for 70L to 80L cover. Is this the good term insurance plan.

Also please suggest some low risk investment plans that I can invest into(after closing my LIC policies) The budget would be 8K monthly.

Once again thank you for the knowledge that you spread.

Deepak Pandit
Deepak Pandit
Reply to  Jagoinvestor
10 years ago

Do you mean I would NOT be getting me money back, or will the policy be in its cooling off period ?

Also can you suggest some low risk investment plans.

I have ordered your books just now from flipkart and I am dying to read them.. 🙂

Kalyan
Kalyan
11 years ago

Thanks for the post. I now decided to forego my LIC retire and enjoy policy which i took last year with a hefty premium of 60k PM. The cover i get is merely 15 Lakhs and to get my money back i have to live till 60 years. I will put 20% of the money i.e., 12000 in a pure term policy and rest of the amount in any investment product. I hope this is a wise decision, though i would be losing 40k(which i paid as a first premium).

Shriyal
Shriyal
11 years ago

Dear Manish,

First of all thank you very much for educating us through your blogs. I am 30 Yrs old and have started learning about “Personal Finance Management” and happened to come across your bolg and now its been 3 days and I cant stop reading :). I will read every bit on this blog! I am learning more and more about Insurance and am convinced that simple term plan is best for me!

In our country, very unfortunately finance management is not taught in our schools/ colleges ( I was very good at integrations/ derivations 🙂 which are of no use now 🙂 Pls take me on a lighter note. In a way you are doing service to the public and keep up good work.

I am now a fan of yours!
Cheers!
Shriyal

Shriyal
Shriyal
Reply to  Jagoinvestor
11 years ago

Sure Manish! Its my new mission now! I know many of my friends are in need of it 🙂

Shriyal

vipin nair
vipin nair
11 years ago

Hi Manish,

This is the first time I am putting my comment on your website. Hope you get a few moments to help me get a valuable reply.

I am married man planning to extend my family soon. My parents are dependent on me and have a sister whose marriage is planned in 2 years.

Please see my investment details as below:

1. I took a ULIP worth Rs.6 lakhs life cover in Dec ’08 and the present fund value shows Rs.1,04,000 with an annual premium of Rs. 30,000. (although I have paid around Rs.1,20,000 till now)
2. I took an LIC Jeevan Saral of Rs.5 lakhs in Sep ’11 (one for myself and my wife each) with an annual premium of Rs.24,500 each
3. I took another LIC Jeevan Saral of 3 lakhs in Sep ’11 with an annual premium of Rs.14,700
4. I took an LIC Whole Life Policy of 2 lakhs in Sep ’11 with an annual premium of Rs.6400
5. Worst part: I have no term plans !!

I am a novice in financial things and was lured into taking the above LIC endowement plans by my father’s friend, an LIC agent unfortunately 🙁

I started reading your blogs 2 months back and now I am a bit unsure about what to do with all these LIC policies.

Kindly advise..!!

vipin nair
vipin nair
Reply to  vipin nair
11 years ago

Just to add, actually I am thinking of closing the Bajaj Allianz ULIP and invest it in some other equity option..please advise if this is a sound decision.

I am also okay to close the LICs because they are just one year old and put the resulting saved amount into other things..or may be close only 1 or 2 of them and add a term insurance to strike a good balance.

But again I need some guidance if this is a sensible step. HELP !!

(Fyi: I have a home loan of 12.5 lakhs taken 2 years back as another liability)

yatendra
yatendra
11 years ago

hi…
i come to know your site just two weeks before .
this is really excellent and infomative….i always had some questions in my mind but now i got the place from where i can get all my answers .thanx
Manish i want to know that i ‘m interested in investing 7-8 lac. in equity fund for 10 -15 years ..for that what are the good funds…and what is your opinion on axis funds , AIG , please respond .
thanks

Ankit Pandey
Ankit Pandey
11 years ago

Hi Manish,
Loved your blog !! I’ve just started earning and need your advice. I am 24 and save about 25-30 k per month. I am considering to choose the following investment avenues –
–> 8k per month SIP in Equity MF / ELSS
–> 5k per month recurring deposit / PPF
–> 5k per month is debt mutual funds
–> 5k per month (60k per year) direct equity
–> 8.5k per annum for a term insurance cover of 1 crore for 35 years
–> Remaining amount in Gold ETF
I am not at all risk averse at this point as I am single with no dependents. Kindly address my following queries –
–> Which between these two should I go for — ELSS or Equity MF ?
–>Which is better in terms of returns (long term post-tax) RD or PPF ?
–> Any investment advice or modification in the above-mentioned investment portfolio ?

Ankit
Ankit
Reply to  Jagoinvestor
11 years ago

Thanks Manish !! Really appreciate your quick response !! 🙂

Shashi
Shashi
12 years ago

Hey Manish ,
Thanks for the reply .Actually i was looking my email ,if i got ur response . but didn’t see any mail so thought there is no response from you side

Shashi
Shashi
12 years ago

Hi Manish, i recently saw ur site while surfing net and ur blogs were like eyes opener for me. I earn rs 25000 per month and can invest 60000 per year (started investing from this year as took jeevan anand premium around 50000*21 and one other plan premium around 7000*15.)After reading ur blog its look like i did the blunder ,Now can u please let me know what options i have and how can i invest money where i will get more returns+high coverage. I placed order for ur book via flip kart as i am more curious now about understanding investments. Wants to hear from you
Thanks

Sharan
Sharan
12 years ago

Thanks a lot for sharing your views, completely agree with you.

With every insurance prod, we get a cover (however petty) in lieu of which a part of premium is allocated for mortality cover (and at a much higher rate than term insurance). So, we always end up paying a stream of money for which we do not get anything more than our peace of mind. But we never realize this!!

Yash Dubey
Yash Dubey
12 years ago

Hi Manish,

Finally I have decided as to where I want to park my money:

ELSS: Not sure amongst Canara Robeco and HDFC TAX Saver – 1500 (HDFC is a consistent player but Canara has started giving good returns in the last 5 years)

Balanced: HDFC Balanced – 2000

Small and Mid-Cap: ICICI Discovery – 1500

Please let me know if this is fine. I have tried to do the thorough research for coming up with these names like ratios and long term returns but still confused like hell.

Looking forward to your reply. 🙂

Yash Dubey
Yash Dubey
12 years ago

Thanks Manish for the suggestions. One of the reason for starting early is that I want to understand the functioning of markets and various investment oppertunities available.

I will come back to you after finalising the products. In the mean while I will keep enjoying the invaluable suggestions available in this site.

Thanks a lot.

Yash Dubey
Yash Dubey
12 years ago

Hi Manish,

It is said that the best investment startegy is to start as early as possible. So, I was thinking of buying Life Insurance policy for some time now but had never act on it. Today while browsing through the net I thought of learning more about insurance and with a coincidence came across this site and guess what, even after 2.5 hours I am still glued to this site. I must say this is the best site I have came across for information on Life Insurance till date.

By the way I am 23 years old and want to invest 5k-8k monthly(my monthly salary is 24k). Can you please suggest me as to where I should park my money?
I was considering taking an Term Insurance, an SIP of 1500(mainly HDFC Balanced, suggest if you have better option), and rest in PF or somewhere.

Thanks a lot for this wonderful and informative site. Looking forward to hear back from you.

SK. KHAMARUDDIN
SK. KHAMARUDDIN
12 years ago

excellent. u have done a great job. u reminded amartya sen by ur writing.

VIGNESH
VIGNESH
12 years ago

EXCELLENT ARTICLE..I am new to all this(college graduate just joined into a job)…..I want to ask you more queries regarding tax and mf.will u be able to mail your mail id. it will be helpful. thanks.. once again its a very superb article without any technical jargons

Peenuts
Peenuts
13 years ago

Excellent article as usual 🙂

Sathishkumar
Sathishkumar
13 years ago

Dear Manish,
This is sathish. I am LIC insurance Agent. I got this license 2 months back.
After becoming an agent, I should know some LIC policies in detail and as well as financial planning. (I always think of Inflation)
While surfing I got into your blog. I really thank the situation.
After all I read the articles, I come to know, Term Insurance is the best for everyone.
Presently I working in a private company and doing part time job as LIC Agent.
In most of the comments your saying “Peace of Mind” is important. Its true.
I just want to do a part time job to earn and satisfy myself as well as the person who is taking the policy.
Your lead me in to a new path.
Thanks for that.
(Note: I am from chennai, I am not good in english. If i done any grammatical mistake, I apologise for that.)
Thanks & Regards,
Sathish

Sathishkumar
Sathishkumar
Reply to  Jagoinvestor
13 years ago

Dear Manish,

Thank you so much.

Thanks & Regards,
Sathish

Chaust
Chaust
13 years ago

Thanks Manish for the quick reply(so its not only me who sits up late at night) 😉

1. Yes you are right about selling it asap. However, i would probably do some more research before taking that option. For now, its doing fine and i believe it could probably help me in the long run(as you mentioned) to balance my portfolio and even build up some capital for kid’s education etc.
I will try to share more details of this plan with you..seems like this ULIP plan is less evil than the rest out there 😉 But i would really want to hear what you make out of it.

2. Yes i will act on your suggestion and go in for term insurance. Could you please suggest any other good term insurance plans other than iTerm?

Thanks !