Are you still buying traditional insurance plans for investment?

I am still appalled to find many people still buying life insurance policies( especially endowment/single premium/money back) for the purpose of investment. When you are investing your money, you want to have returns that beat inflation for a longer period of time. When you are buying life insurance, you are doing so to protect your family against financial distress in case of your sudden death! The two objectives have nothing in common.

In India , financial advisors ( read insurance agents) sell these policies in name of tax saving,bonuses,long term returns etc. If you see the hard fats, most of such policies won’t yield you more than 5% in the long term. Let me give you an example:

Lets look at a benefit illustration of LIC Endowment Plan:

As you can see, a 30 year old health male is paying about 2900 per Lakh of insurance. So what does the person get @4% returns- 2.4 lakhs. (don’t even bother to look at 8% returns as LIC bonuses range between 3-5%). Now when people sell you this policy, then 2.4 lakhs looks like a huge amount at maturity but actually you’d have actually put about 90,000 as investment in this plan and you won’t even double your investment in 35 years! ( The reason for the same is the fact that the bonus is not compounded and the bonus rates are too low- thats double whammy for any long term investment!). Also not to forget- you can’t sell your investments for 35 years(unless you are willing to take a loss on your investments for a surrender value)

Money back policies are even worst in terms of returns but play on the investor psychology of “getting his money back”.

Now look at the insurance bit- by paying 2900 per annum, you are getting a cover of just 1 lakh whereas a similar sum can buy you a 25-50 lakhs of term insurance cover! Get a quote here.

So next time when someone coaxes you to buy a traditional/endowment plan- ask him/her these hard questions. This might be a good time to take a fresh look at your insurance and investment portfolio.  Also remember that money decisions are not to be taken based on emotions but based on data and your financial goals. You work hard for your money, let it work even harder for you.

Also see- Are Endowment plans any good for wealth creation?

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