Recently the writer was
approached by a SDM of an insurance company with a proposal to take up agency
of their company and sell insurance policies. Traditional plans was to be the focused
upon. With ULIPs losing their appeal (since with cap on costs, the commission
has also been reduced), traditional plans are being pitched aggressively..
Traditional plans are back in
vogue. Not because they help the investors meet their long term goals, but
because it pays big commissions to the agent. A traditional plan currently pays
nearly 30% of the first year’s premium as commission apart from other
emoluments to the insurance agent. It’s time the investor ask themselves:- Does
endowment policies serve any purpose? If not are there any alternatives? Let’s
try to find out.
Let’s take a hypothetical
example of Anuj who is a 30 year old male—who wants to build a retirement
corpus when he turns 60. His Endowment policy would look as under:-
Tenure 30 years
Sum Assured 10 lacs
Annual
Premium Rs. 30,723(including
Service Tax)
Maturity amount Rs. 21.46 lacs(at
6%)
The
following conclusions can be drawn from the above information:-
Annual Premium
outflow Rs. 30,723/-
Premium
payment term 30 years
Death claim
payable Rs. 10 lacs
Likely maturity
amount Rs. 21.46 lacs (plus loyalty bonus if any)
Let’s calculate the interest earned on this payment. Rs. 30723 paid for
30 years becomes Rs.21.46 lacs
The formula for Rate is (nper,pmt,pv,[fv],[type) where
Nper
is the period of payment
Pmt
is payment per period
Pv
is the present value of the payment
FV
is the future value receivable
Type
is payment at beginning or end of period
Substituting the values in the
equation for Rate= (30, -30723,0,2146000,0),R is calculated to be 5.3%. Is this
rate good enough to justify your hard earned money? We believe the only reason
people buy endowment plan is for compulsory savings that such plan tends to
demand of them. Insurance cover is a bye product that they get—which any how is minuscule and irrelevant. It also gives the investor a mental satisfaction that
they have done financial planning (?) for their family.
The basic premise of an
endowment policy is insurance+returns. So let’s try to work out a combination
ourselves which will be better than the endowment and yet costs less.
A.
For a Highly conservative Investor
Term Assurance for Rs. 30 lacs
for 30 years---Rs. 8676/- per year.(incl. service tax)
Invest Rs. 22000 per year in PPF
for 30 years--- Rs. 26.90 lacs.
Amount Invested: - Rs. 30676 per
year (8676+22000)
Death
Benefit : - Rs. 30 lacs+PPF
Maturity Benefit:
- Rs.26.90 lacs (PPF maturity)
B.
For An Aggressive Investor
Term Assurance Rs. 50 lacs—Rs.
12600/- p.a.
Investment in MF through SIP: - Rs.
(30000-12600) -- Rs.17400/-
(returns assumed
15% CAGR)
Death Benefit Rs.
50 lacs+Mkt value of investment.
Maturity Benefit Rs. 1.05 crores (Mutual Fund maturity)
Hence, it is advisable for
people who have taken an endowment policy to convert it to a paid up policy and
divert the current premium in one of the options as above (depending upon your
risk profile). However, if the term of the endowment policy is nearing
maturity, then let it run to maturity.
Insurance is supposed to
replace your income in your absence. It is not supposed to supplement it.
Insurance is not designed to generate returns, but manage risk. There are other
products for investments. People are advised not to get lured by the fancy features
of the policies and exotic excel illustrations. Judge the policy by your
requirements and not that of the agent’s.
Disclaimer:- The figures used above are for illustration only. The
exact figure may differ from those above. Premium figures are that of HDFC
Standard Life Insurance Co. Ltd.
Views
expressed are personal views of the writer. Investors should use their own judgment
and discretion while evaluating their requirements. It is advisable to appoint
a certified planner for impartial professional advice.
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