Life Insurance is not an investment. Yes, take a moment to digest this.
The whole point of Life Insurance is to financially protect the ones you love in the event of your demise. You are setting aside tiny portions of your income now, so that when you are no longer around, your loved ones will still have that money to secure their future.
Your life insurance is not there to make you richer while you are alive. It’s for them, not for you.
We know that it isn’t easy to accept this fact, especially with so many ads and salesmen telling you how Endowment schemes and ULIPs are “safe investments” and how you should be putting your money into them. This is why we thought we would test out their claims and present the results for you to see.
Endowment policies are typically money-back life insurance schemes. Once the term expires, they give back your premiums along with some nominal returns (about 5%). ULIPs promise slightly higher returns (about 12–13%) as they invest a part of your premium in equity and debt just like Mutual Funds.
They definitely sound like investment schemes, don’t they? They talk of returns! But what no one is telling you is that these schemes fail miserably at doing the following two things:
- giving you adequate life cover at reasonable cost
- giving you good returns on your investment
Endowment policies require you to pay really high premiums for adequate life cover. And while ULIPs have been forced by the regulator to get their act straight, the case for these schemes — inadequate insurance cover, 5-year lock-in and poor track record of returns — still remains very poor.
We cannot emphasize enough the importance of life cover for your family and the only schemes that do that best are Term Plans. A term plan guarantees your beneficiary a lump-sum payment in the event of your death. It’s clean, it’s simple and it works at surprisingly low-cost.
Low costs also mean you can spare that money and put them into pure investment opportunities. A combo of a term plan and an investment in a top-rated equity mutual fund will yield you better results than any Endowment scheme or ULIP.
It might seem a little counter-intuitive to think of it in the abstract. So, we actually have done a detailed analysis to show you what we mean.
For our analysis, we considered the case of a 30-year-old, who is willing to commit a sum of 31,000 annually. Let’s assume that she can put her money in one of these three ways:
- An endowment plan that asks for an annual contribution of 31,000
- An online ULIP of a leading insurer that has the cheapest expense charges
- A combo of a Term Plan with an annual contribution of 14,157 and a top-rated equity mutual fund with an investment of 16,843 every year. (How did we get at these numbers? Write to us on insights@wealthy.in and we will get back to you.)
As ULIPs are available for a maximum period of 20 years only, we have had to limit our analysis to that term period only.
Comparison of Benefits in Three Different Cases:
| Endowment | ULIP | Term Plan + Mutual Fund |
|---|
| Annual Contribution | 31,000 | 31,000 | 31,000 (Term Plan: 14,157 + MF: 16,843) |
| Guaranteed benefit on death | 5.5 lacs | 4.2 lacs | 1.9 crore |
| Tenure | 20 years | 20 years | 20 years |
| Benefit on Death (in 10th year) | 8.2 lacs | 6.3 lacs | 1.9 crore + 5.5 lacs = 1.96 crore |
| Benefit on Death (in 20th year) | 10.7 lacs | 26.5 lacs | 1.9 crore + 41 lacs = 2.31 crore |
| Benefit on Death (1 day after 20th year) | 10.7 lacs | 26.5 lacs | 41 lacs |
The results are there for you to see:
- Buying an expensive endowment insurance plan is the worst outcome in all scenarios. The cover in case of your loss of life is inadequate and your investment does not even beat inflation.
- ULIP can give better returns, but it does a poor job of insurance + investment with a very low guaranteed death benefit.
- Term plan does a great job of insuring you adequately and investing the balance amount in top-rated equity mutual funds gives your money a better chance to multiply itself.
Read more about Mutual Funds here: What is Mutual Fund and why you should care about it
So, the next time some salesperson tells you how their endowment plan is best for you, or if you come across a ULIP scheme online through an ad, please take a few days to see if a term plan + investment combo works out better for you. We believe that there will always be one that can beat the “safe investment” policies.
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