Endowment plans (LIC Policies) are very popular in India. Knowingly or unknowingly, most people end up buying this type of policy. They appear to be simple, transparent and highly beneficial.
They are insurance cum investment products. However it is not recommended as they offer a sub-optimal combination of insurance and investment.
Then why are they so popular?
- A lot of us buy insurance in haste and that too for the sole purpose of saving tax and they do so without fully understanding the products.
- Often the advisor is a neighbour, or a friend or, even worse, a relativeš. Itās kind of difficult to turn them down.
- Many people see insurance as a useless expense and hence they think itās better to just buy a product that will give some return as well.
Example
Pay yearly premium of 36k (3k a month) for 16 years and then after 25 years you will receive 19.60 lakh plus you get life insurance worth 10 lakh
Wow Iāll receive nearly 20 lakh for a premium of 5.6 lakh, thatās fantastic, maybe Iāll go for a World tourāš½Ā or maybe it will take care of my childās educationš..
However wait a moment..
A life cover of 10 lakh is grossly inadequate.
And what is the return on your investment?
It is only 5.6% and such policies give return in the range of 5 to 6% only.
These policies neither provide adequate insurance, nor are a good investment solution.
So what are the alternatives?
It is always better to keep insurance and investment separate.
InsuranceĀ ā If your family is financially dependent on youšØāš©āš§āš¦, buy a term insurance which is at least 20 times your annual income. If you earn 10 lakh, buy a cover of at least 1.5 to 2 cr.
1 cr policy for a 30 year old will cost only Rs. 8000/- a year.
InvestmentĀ ā Put the remaining money Rs. 28k in well-diversified mutual funds.
