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February 2019
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MUST READ: Insurance is NOT an Investment

Have you invested in life Insurance plans to get returns on maturity in future?

Did your insurance advisor/agent persuade you to buy ULIP insurance for your child education or retirement?

If yes,than you are trapped under one of the poorly understood areas of personal finance:  

                                           Mixing Life Insurance with Investment.

The cruel fact on personal finance is majority of people don’t understand the difference in Life Insurance and Investment . They do Life insurance for sake of investment and this is the biggest mistake in personal finance.

  • 90% people do not understand the difference between various life insurance products: Term Plan, Endowment Plan, ULIP plan, etc.
  • Most of the people want to buy an insurance plan because they want to save tax.
  • They think insurance is one of the safest investment options where you get decent returns on your investment.

 you need life Insurance to financially protect your family in case of death.But,Unfortunately, most of the people fall victim to Insurance Agents.Most of the people do not understand that the fundamental reason behind life insurance is to provide life insurance and not investment. Advisors give Most of the plans in the category of Endowment plans and Money back plans.This is because Term Insurance is the least profitable, which is ACTUAL INSURANCE.

Let’s take an example, calculations of LIC Endowment vs Term Plan:

Endowment Plan:

Term Plan:

Source: licpremiumcalculator

POINTS TO BE NOTED-

  • In order to get minimum sum assured of Rs 50 lakh on death, you have to pay an annual premium of Rs 2,27,167 in endowment plan whereas in term plan you just need to pay Rs 8,496!
  • If you compare monthly premium, you need to pay Rs 19,333 in an endowment plan whereas just Rs 708 in term plan.
  • You are paying a total premium of Rs 35,61,310 in endowment plan and just Rs 2,12,400 in term plan. A difference of Rs 33,48,910.

Now you will say that in endowment plan, you will get Rs 1.35 crore on maturity after 25 years and you will not get anything in term plan. If we take the difference between endowment plan and term plan premium and invest that amount in better options like mutual fund then we will get much higher returns.

Monthly difference in total premium for 16 years: Rs 18,625 ( 19,333–708)

(Note:endowment plan where the premium has to be paid for 16 years.)

If you make a SIP of Rs 18,625 in mutual fund and expect a return of 12% then after 16 years you will get Rs 1.1 crore. Now, you keep that amount in the mutual fund without any further investment and keep getting 12% return for another 9 years, then by the end of 25 years, you will have Rs 3 crore which is Rs 1.65 crore more than endowment plan return!

Source: sipcalculator

Conclusion: When it comes to life insurance, you should never mix it with investment and always opt for term plan.

Happy Investing