At the time when life insurance companies are caught on the wrong foot with their ULIPs and stock market fluctuations, the focus has come back to the traditional Endowment & Money Back plans.
Money Back Plan – In this kind of plan the insurance company, on survival, returns wholly or partially the premium paid by you at different time intervals or at the end of policy coverage.
This plan is pitched by insurance agents as ‘Zero cost insurance plan’ or ‘life insurance for free’. But its the customers who need to think if these plans are the best form of insurance and also if the above pitch of “free life insurance” justified.
Interestingly Money back insurance plan’s and Endowment plan are looked upon as a saving instrument by most people in the country.
The thought process is “what do I get if I survive? And all the premium that I paid in Term plan is wasted, but in money back I at least get my premium back”.
In small towns of India we still find the salaried/middle class people saving for their retirement, child’s education, marriage, etc through LIC/Insurance policies. They think Mutual Funds and Equities are too risky for them. It’s for the rich!!! Well I feel it’s this feeling that’s preventing them from being rich.
Let me show how insurance products are actually making you poor.
Well for this I analyzed a product from leader of the pack – Life Insurance Corporation and its offering Bima Bachat (Single Premium Money Back Policy).
I did the analysis under following conditions:
- Age @ time of taking insurance: 28 years
- Policy term: 15 years (Max Cover allowed)
- Payment term: 1 year
- Premium: Rs 7,41,106
- Insurance Required: Rs 10,00,000
Well First I would go for some common sense analysis. If today I am capable enough to pay Rs.7.5 Lakh as premium for LIC Plan, do I need insurance of Rs.10 Lakh Only?
I don’t know but why Indian insurance companies have not still learned the meaning of “Insurance”.
Now that this product fails miserably as insurance product lets see if it can generate returns for you.
In the table below I have calculated the annual return you would generate based on cash Flows every year. Here are some more assumptions and facts about the table.
- For Term Plan Insurance (Anmol Jeevan-I from LIC) of Rs. 10 Lakh I have taken single premium term plan for 15 years whose premium is Rs. 23,070.
- PPF Annual Return: 8% (the safest return guaranteed by Govt. of India)
- Mutual Fund 15 years Returns
- Best: Reliance Growth Fund ~ 29% per annum
- Average: Sensex ~ 15% per annum
- Worst: LIC Equity Fund ~ 5.6% per annum
In this table I have taken 15% return for Mutual Fund Analysis. Number in negative shows my cost.
| Cash Flows | |||
| Date | Bima Bachat | Term Plan + PPF | Term Plan + MF |
| Insurance Cost | -741,106 | -23,070 | -23,070 |
| Investment | 0 | -718,036 | -718,036 |
| 1-Nov-2010 | 0 | 0 | 0 |
| 1-Nov-2011 | 0 | 0 | 0 |
| 1-Nov-2012 | 150,000 | 0 | 0 |
| 1-Nov-2013 | 0 | 0 | 0 |
| 1-Nov-2014 | 0 | 0 | 0 |
| 1-Nov-2015 | 150,000 | 0 | 0 |
| 1-Nov-2016 | 0 | 0 | 0 |
| 1-Nov-2017 | 0 | 0 | 0 |
| 1-Nov-2018 | 150,000 | 0 | 0 |
| 1-Nov-2019 | 0 | 0 | 0 |
| 1-Nov-2020 | 0 | 0 | 0 |
| 1-Nov-2021 | 150,000 | 0 | 0 |
| 1-Nov-2022 | 0 | 0 | 0 |
| 1-Nov-2023 | 0 | 0 | 0 |
| 1-Nov-2024 | 741,106 | 2,277,732 | 5,842,703 |
| Annual Returns | 5.49% | 7.77% | 14.76% |
In case we take worst performing Mutual Fund. Your annualized return would be 5.36% amounting to Rs. 16.25 Lakh in 15th year much closer to the one provided by Bima Bachat. While if you invest in best mutual fund your annualized return would be 28.73% amounting to Rs. 3.27 crores.
Now we consider insurance aspect i.e. how much is the death benefit. Remember we have purchased term insurance for Rs 10 Lakh. Table below shows the death benefit…
| Amount Payable to dependents in case of Death | |||
| Date | Bima Bachat | Term Plan + PPF | Term Plan + MF |
| Insurance Cost | -741,106 | -23,070 | -23,070 |
| Investment | 0 | -718,036 | -718,036 |
| 1-Nov-2010 | 1,000,000 | 1,775,479 | 1,825,741 |
| 1-Nov-2011 | 1,000,000 | 1,837,517 | 1,949,603 |
| 1-Nov-2012 | 1,000,000 | 1,904,519 | 2,092,043 |
| 1-Nov-2013 | 1,000,000 | 1,976,880 | 2,255,849 |
| 1-Nov-2014 | 1,000,000 | 2,055,030 | 2,444,227 |
| 1-Nov-2015 | 1,000,000 | 2,139,433 | 2,660,861 |
| 1-Nov-2016 | 1,000,000 | 2,230,588 | 2,909,990 |
| 1-Nov-2017 | 1,000,000 | 2,329,035 | 3,196,489 |
| 1-Nov-2018 | 1,000,000 | 2,435,357 | 3,525,962 |
| 1-Nov-2019 | 1,000,000 | 2,550,186 | 3,904,856 |
| 1-Nov-2020 | 1,000,000 | 2,674,201 | 4,340,585 |
| 1-Nov-2021 | 1,000,000 | 2,808,137 | 4,841,672 |
| 1-Nov-2022 | 1,000,000 | 2,952,788 | 5,417,923 |
| 1-Nov-2023 | 1,000,000 | 3,109,011 | 6,080,611 |
| 1-Nov-2024 | 1,000,000 | 3,277,732 | 6,842,703 |
Here the assumption is you get 15% consistent returns on your Mutual Fund investment and 8% on PPF. Clearly here too Bima Bachat is a poor plan.
Conclusion: Don’t buy any product from any Insurance Company in India other than Term Insurance Plan. You can always make a better combination for investment and insurance yourself!