While buying life insurance, have you ever thought why you are buying
insurance? I know around 90% of them have not done their homework before
buying. It may be in a hurry to save few bucks of Tax or with the
advice of your friend, uncle or neighbour who is agent of some
particular insurance company
But which is best-Term Insurance+Mutual Funds or Endowment Plans?
I
will show you with example. Suppose Mr.X want to buy Insurance plan and
looking for the Insurance cover with return. Therefore, he will go
with endowment plans, which are the common investments in all investors
portfolio (About ULIPs I will explain you elaborately in my future
posts).
Here I will consider two plans of LIC’s-One is Amulya
Jeevan (Pure Term Plan) and Endowment Plan of LIC (Plan No.14). Suppose
his age is 30 and he is looking for the cover of 50 Lakh with term of 20
yrs. Then Amulya Jeevan premium is Rs.12,850 and Endowment Plan premium
is Rs.2,49,750.
.
If Mr.X took Amulya Jeevan and start to invest the remaining balance
i.e. difference of Endowment Plan Premium and Amulya Jeevan premium,
which is Rs.2,36,900 (2,49,750-12,850) in any well diversified funds for
the next 20 years. Then his investment at the end of 20 years will be
2,61,98,641 (Term-20 yrs, Monthly he contribute Rs.19,741 which is
2,36,900/12=19,741, Interest considered 15% CAGR). But you may ask how I
may consider 15% as return over 20 years investment. If you look at the
returns of Sensex from Jan 1980 to Oct 2011, equity gave around 18%
CAGR return.
Suppose Mr.X invested in Endowment Plan and his return at the end
will be around Rs.1,35,00,000 (SA-50,00,000+Bonus-60,00,000 60 per 1000
SA per year and Final Additional Bonus if any-25,00,000 at Rs.500 per
thousand SA). Which will give you around 8.17% CAGR return (even after
considering high values for future predictions like Bonus as 60 Per 1000
SA per year and final additional bonus at 500 per 1000 SA). However, if
you consider the returns of Private Insurers then it will again come
down. As per current trend, Private Insurers’ returns are less than LIC
in Endowment Plans.
Therefore, by purchasing Term Insurance and
diverting the remaining amount towards Equity, you can earn more than
just investing in normal Endowment Plans. For your information, today
there are so many Term insurance Plans, which will be available with
very competitive rates in market than what LIC’s Amulya Jeevan costs
you. However, I took LIC’s example because in India LIC considered as
faithful organisation for investment. Insurance company considered as
faithful investment organisation and not faithful insurer…strange but
true
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