Salaried people in India tend to mix their life insurance with investment and 80C tax savings by buying endowment policies. If you are doing so, you are incurring HUGE financial losses without even having sufficient life cover.
Let me explain this with an example.
You are 30 year old with an annual income of 8 to 10L.
CASE 1
You purchase an endowment policy with a period of 30 years and for a sum assured of 20 lakhs, You would be paying premium of 5200 (including taxes) per month. If you happen to live through the 30 year period, you would be paid back (Sum Assured + Reversionary Bonus + Final Additional Bonus) = (20 L + 48*2000*30 + 1100*2000) = 70.8 lakhs.
Here, I have taken Reversionary Bonus Rate of 48 per 1000 of Sum Assured and Final Additional Bonus of 1100 per 1000 of Sum Assured for a 30 year policy, from LIC website.
So, for a premium of 5200 per month, you or your family will be getting back 20 L to 71 L depending upon the number of years you live through. Suppose God forbid, your family loses you in the first few years of your insurance period, they would be getting a paltry amount of 22-25 lakhs !!! Ask yourself, IS THAT ENOUGH ?
CASE 2
Now suppose, instead of above policy, you divide the monthly amount of 5200 into two parts - pure insurance and pure investment. You purchase a term insurance plan of 30 year period with a life cover of 1 crore. Its monthly premium will be 725 to 1500 depending upon the company you choose. Lets assume you purchase the costliest one, i.e. 1500. You would be left with 3700 per month to invest in PPF, Tax Saving Mutual Funds (ELSS), et al. Assuming a modest Compound Annual Growth Rate (CAGR) of 12%, you will accummulate a corpus of 1.3 crores.
The above analysis can be summarized by the following graph.
As can be clearly seen, the blue graph is always above, way above the yellow one. Means, with same monthly premium, your family will be getting back a much higher amount (4 to 5 times) in the unfortunate event of losing you, in case 2 as compared to case 1. And if you happen to live through the 30 year policy period. you will be getting back almost twice in case 2 as compared to case 1.
Also, in case 2, because the lock-in period of ELSS is 3 years only, you can encash full or part of mutual fund corpus at any time when market conditions are favouable for consumption purpose or in case of emergency. In case 1, part encashment is impossible and surrendering a endowment or any mixed policy entails HUGE LOSSES because you don't get Final Additional Bonus (22 L in this case).
Hope this was of benefit to you...
