Now a days this is a hot topic to discuss as march month is nearer and everyone is looking to save tax..As far I think insurance sector is the most successful among all 80C contestants..Unit linked Insurance Plans are realtively newer,but endowment and money back policies have a long tradition and we will have a brief look at it.
Endowment plan means one need to pay a fix premium each year and insurance company will offer you an insurance cover and offer some bonus which is declared nearly each year depending upon interest rate enviornment.Investor will get this accumulated bonus and sum assured at the end of policy term.While in money back policy,certain % of sum assured is returned back to investors periodically.Bonus and last remaining part of sum assured will be received at the end of policy period.
Pros And Cons Of Bonus received:
Pros:Bonus is based on sum assured.E.g Bonus is declared as Rs 35 / 1000 Sum assured.Means for sum assured of Rs 2 lakh,one will pay a premium of Rs.9000/- and bonus will credited Rs.7000/- in his account..isn’t it a nice thing?
Cons:Value of bonus will remain as it is throughout policy term.What will happen if I keep Rs 1 lakh in my cupboard for 20 yrs?Value of that one lakh will remain one lakh only..similarly value of Rs.7000/- received as a bonus will remain Rs.7000/- till end of term.Bonus is a virtual profit only and can be realized only after completion of policy term.
How to Stop Insurance policy:
There are generally two methods ;
Surrender:One can surrender the policy and take % cash back from the company.In initial years surrender value is much less as insurance company has a greater liability towards sum assured in first few years.E.g consider following table,if policy holder die in first year,then company has to bear maximum liability as he has paid only one premium..while if he die at 10th policy year then company will have a less liability as investor has paid number of installments earlier.
| Policy Year | Total Premium paid [Rs] | Sum assured |
| First | 10,000/- | 3 lakh |
| Tenth | 1 lakh | 3 lakh |
so % of surrender value will be very less in first year and substantially higher at 10th year.
Paid Up:Maximum of policies go to paid up status if premiums are paid for first 3 yrs and not paid thereafter.In paid up condition,sum assured get reduced to extent of paid up value.SA and accumulated bonus is paid at the end of the term.
How To Calculate Returns?
Frankly i do not know..One can only say that system of indicative returns of 6% and 10% looks wrong.Few days back I read one book related to”Mathematical Modelling And Computer Simulation”.I can remember few lines from this book : ‘No model is accurate.In fact system always behaves differently.This happens because we always fail to incorporate all the parameters or make invalid or ignore vital assumptions’ I think this is as well true for such insurance policies also.One can show returns as 2-4%,One can 4-6% or one can even 8-10% as well.It all depends upon everyones understanding of system and assumptions made.Few days back I have a post on returns of money back policies and I conclude that returns will be around 7% CAGR,excluding cost of insurance and tax benefits.I can not claim that this analysis is true or not.
Should I buy this or not:
I think it will not matter much more if any one have 1-2 such policies in his portfolio.
In one of the earlier post Mutual Funds vs ULIPs,I stated that advantage of insurance policies is that policy holder pays premium carefully at least due to fear of policy lapsation and there is not such motivational advantage for other instruments like mutual funds.so having one of such policy will at least assure you to have a saving in longer term,isn’t it?
Disclaimer:
Blog author is not related to LIC or any other insurance company neither he holds any certification regarding insurance sector.Please take advise of your advisor before buying any financial product.
Wow..!!! This is a helpful and informative blog. Thanks for this helping info.