A paradigm of Investing in LIC Policy
Let’s start the discussion on investment decision in LIC policy is good or bad by taking an example of Jeevan Anand (815), the most famous policy of LIC and compare the return of the Policy which is insurance and investment mixed policy with LIC’s eTerm insurance plus PPF. You will get tax benefits under section 80C for both the options. The details pertaining to Jeevan Anand (815) are as follows:
- Sum assured: ₹ 25,00,000 (A)
- Policy term: 30 years (B)
- Annual Premium: ₹ 89,837 (C )
- Approximate Maturity including Bonus: ₹ 89,25,000 (D)
Now let’s assume that we have taken eTerm insurance of ₹ 25 lakhs for 30 years for which the premium works out to be ₹ 4,307 per annum. The remaining amount i.e. ₹ 85,530 (₹ 89,837 – ₹ 4,307) is invested in PPF which is currently fetching interest at 7.90% per annum.
- Annual contribution towards PPF: ₹ 85,530 (P)
- Maturity amount of PPF: ₹ 1,02,64,705 (M)
- Annual Premium of e-term: ₹ 4,307 (E)
- Maturity amount of e-term: ₹ 0 (S)
Difference (M+S-D): ₹ 1,02,64,705 – ₹ 89,25,000 = ₹ 13,39,705
As per the above comparison, it is prudent that opting for PPF plus eTerm would fetch you ₹13.40 lakhs more thus LIC is good for insurance but not for investment.
Now the second question arises if returns from the LIC are so bad then why we Indian opt for LIC policy as an investment?
My neighbor’s son who recently graduated was in search of a job. His uncle who is also a LIC adviser has helped him to get a decent job. Now the social obligation has started and my neighbor paid that off by taking two LIC policies which even they knew were irrelevant and would not help to attain any of the financial goals. But because of the help, they got from the uncle they had to take the policies.
As the financial rule says “Return of Capital is more important than Return on Capital”. Being backed by Government, LIC has implied Government Guarantee and thus no chances of default. People consider buying LIC policy is similar to making FD in SBI & not in some private banks, even though the returns are as bad as 4% to 5%.
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Being the oldest insurance player and having a legacy of 50 plus years, LIC has a vast network of advisers. It has become customary to buy LIC policy. The time has long gone when the rate of return of 4%-5% was considered good, now with the inflation rate running around 7%, investing in LIC policy is a big wealth destroyer.
LIC advisers never talk about IRR or CAGR return but they always talk like “your money will be doubled or tripled in 10 years to 20 years”. Most people can’t calculate the annual returns and the returns shown in the paper are not the actual returns. As for example, LIC Jeevan Shanti was sold to my colleague stating that the returns will be as high as 21.34% while the actual returns were 5.94%. The plan states that investing ₹ 10 lakhs provides Pension of ₹ 17,062 per month i.e.₹ 2,13,400 per year for 30 years after 20 years which simply means Rate of returns 21.3% on an investment of 10 Lakhs which even the best mutual funds unable to deliver in long terms. Now if we calculate the IRR by putting the figures in excel we get the IRR of 5.90%.
Tax-Benefits of LIC Policy
Most of the people tend to read deduction under section 80C for Life insurance premium as an insurance premium for LIC. It is as similar to knowing toothpaste means Colgate only or soap means lifebuoy only. The deduction is for the insurance premium for Life insurance policy whether it is taken from the LIC or from some private insurer such as HDFC, ICICI, etc. Further, deduction similar to Life insurance is also available for various tax avenues such as PPF, Sukanya Samriddhi Yojana, etc.
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Words of Wisdom
If investing in LIC provides serious returns than entire India would have been a much richer nation. But the truth is only LIC and its advisers are making money, not the investors. I hope that the above reasons shall help you understand why LIC Endowment Plans still dominant over the endowment plans even by the private insurers.