In the first part of the blog here, we looked at why Insurance is not an ideal investment. Let us look at this a bit more quantitatively now, to let the numbers do the talking.
We will compare quantitatively the returns from the two scenarios below:
- “Invest” in LICs “New Endowment Plus” policy of 10L over a period of 20 years
- Buy a term life insurance of 50L and invest the rest into a mutual fund
Assumptions have to made to compare the costs since insurance costs are dependent on the starting age. We will for example assume, a 30 year old woman is buying the policy.
Scenario #1 – New Endowment Plus
Coverage details for a 30 year old woman “investing” for 20 years to cover 10L of Sum Insured, the premium amount per LIC website is 1L per year.
For above scenario and this is the fund return illustration from LICIndia.
- Look at the charges in column 3, 5, 7 and 10.
- Look at the net yield after assuming an 8% return (which by itself is a significant return assumption for a insurance fund)
Finally, with all the investment at the end of 20 years, you are likely to make around 41,72,102. (41 Lakhs or 4.1 million).
Scenario #2 –
Assuming no tobacco user/ no alcohol user, for a 30 year old woman the cost of term insurance of 25L (2.5 million). The cost of insurance illustration from LICIndia below
In short, the cost of that insurance of 25L is 12K approximately. So comparing to scenario #1, we are left with 88K to invest (see cost of 10L insurance was 1L per year).
Illustration below of – A mutual fund SIP of 7K per month (84K per year) in the Nippon India Growth fund (Previously called Reliance Growth fund) for a period of 20 years. Calculation courtesy www.moneycontrol.com
Again, can you believe what you are seeing here? The Mutual fund investment of 7K per month would have fetched you 1.8Crores with an annualised returns of 20% YoY!
In short, you spent only 12K a year on your insurance. Invested 7K per month (84K per year) on Mutual funds over 20 years. This will result in you earning 4.5 times of what an LIC Endowment plan will return.
Finally, I hope these two articles now have made it clear for you that Insurance and Investment are best kept apart. And hey, did you also notice in Scenario #1, your coverage was 10L and in the Scenario #2 the coverage was 2.5 times of Scenario #1 (from the LIC which we all trust so much)?
