I am an advisor following the old school of thought. Firstly don’t mix Investment with Insurance. They are distinctly different and serve different purpose. Secondly once segregated focus on value investing & slowly but steadily building up your corpus with a judicious mix of equity & debt. Now let us understand the different investment avenues.
For comparison I have taken an endowment plan with a premium of ~Rs.50,000 and a mix of term plan with 5X the cover along with PPF or with an ELSS for tax saving purpose. It would be worthy to note here that no insurance company pays out of its own pocket. Whatever it gets in premium from you it deducts the commission (which is significantly higher compared to mutual funds & is NIL for PPF) and mortality charge (about 2.5% – 3.5% of premium paid and increasing with age) and invests the remaining amount largely in debt investments earning about 7-8% interest. Thus post all expenses you end up earning about 4.5% to 5% on your investment.
I believe that insurance is aimed to provide financial security to dependents & ideally a person should be covered till the time he builds up a similar corpus before he retires. Incidentally premiums start going up sharply from the age of 55-60 as risk premium increases. Thus the following investments are based on premium payable by a 35 year old male for 20 years. I have conservatively assumed returns of 5% on endowment policy, 8% on PPF and 12% on tax saving mutual funds (ELSS). Actual returns may be marginally higher.
Plans | Traditional Endowment Policy* | Term Plan#+ PPF | Term Plan#+ ELSS | ||
Annual Premium (Rs.) | 50064 | Term plan | PPF | Term Plan | ELSS (Monthly SIP) |
13628 | 36436 | 13628 | 3037 | ||
Insurance Cover (Rs.) | 10,00,000 | 50,00,000 | 50,00,000 | ||
Corpus on maturity after 20 years (Rs.) | 17,38,185 | 18,00,474 | 30,34,412 | ||
Comment | Low returns of ~5% and insufficient life insurance cover | 5X higher insurance cover and ~5% higher corpus | 5X higher insurance cover & ~1.8X the corpus | ||
*LIC New Endowment Plan (814)
# LIC New Amulya Jeevan II (823)
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’