A 20-year Traditional Insurance-cum-Investment policy gives you just 4-5% return, that too with a minimum lock-in period of 5 years. One of my friends had bought an insurance policy for him and his wife ten years ago for ₹ 10 lakhs each. And after 10 years, at maturity, he is getting only ₹ 9.70 lakhs. After going through his policy I noticed that it was LICs Jeevan Anand policy. He had taken that policy when he was about to turn 60, hence the mortality cost was high because of his age. There was another catch; his family would get ₹ 5 lakhs after his death (which he didn’t know). If he had invested the same amount in equity mutual fund he could have got ₹ 44 lakhs at 15% return. One should not mix investment and insurance. Insurance is for risk cover and investment is for wealth creation.
Let’s look at another scenario, investing 25,000 per month for the next 20 years would get you a return of 64,000 each month from the 21st year onwards, for the next 16 years. The investment is also eligible for tax deduction under section 80c. The income received will be tax-free and the buyer will also get an insurance cover of ₹ 80 lakhs. Thousands of buyers invest in traditional insurance plans, lured by the triple benefits of the tax deduction at the time of investment, life cover during the policy term and tax-free income on maturity. All these traditional insurance plans will not yield more than 5-6% return. This doesn’t mean that insurance is not important. Insurance is a must for every earning individual and his family. But the right type of insurance to consider is Term Insurance. A 30-year-old male earning ₹ 1 lakh a month should take a term insurance plan of ₹ 1 crore which will cost him a maximum of around Rs 12000 to 15000.
In India, people have this obsession of tax saving. Around 70% of traditional insurance covers are sold in the last 3 months of the financial year i.e. Jan-Feb- March (JFM). life insurance is not the best and only way to save taxes. PPF gives around 7.75% tax-free return and is eligible for deduction under 80c. ELSS is a great option for tax saving and wealth creation in the long term. It may seem volatile in the short term, which may appear risky to some investors. We did a comparison between traditional insurance v/s PPF v/s HDFC tax saver fund, since 1996 till 2016. If a person had invested ₹ 1 lakh every year since 1996 his returns would have been as follows:
PPF returns were 12% in 1996 which gradually declined.
Amount invested 1996-2016- ₹ 21 lakhs
Tradition Insurance at 5% return in 2016-₹ 37.18 lakhs
PPF at 12%-8%– ₹ 55.60 Lakhs
HDFC Tax saver fund at 25.80%- ₹ 5.660 Crore.
Avoid last minute rush for tax saving. Consult your Financial Advisor. Buy Term Insurance online it’s cheaper.