Endowment Plans or Term Insurance with Mutual Funds?

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 🙂 It happens only in India 🙂

8 Responses

  1. Unfortunately I ve been trapped in an endowment policy (whole life, Shubhodaya invest) with SBI Life for the past 5.5 yrs, sum insured: 57Lakhs policy term: 20 yrs, half yearly premium, 11 half yearly premium (11 xRs 1.65Lakhs = 18.2 Lakhs) Paid so far, bonus accrued = Rs 9.975 Lakhs for 6 annual bonus declaration). I ve evaluated Surrender option (Rs 12 Lakhs – 32% tax) with the paid up policy option. If leaving the policy paid up till maturity, will the maturity amount taxable (as the 10 times annual premium exceeds the reduced sum insured). So when should I leave my policy paid up to enjoy the tax benefit 10(10D)?

  2. i read your article , it was very nice to plan .
    can you suggest me now current which term insurance is good for me , now i am 30 years

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