My relative who is an LIC insurance agent is pitching me LIC's Jeevan Anand plan. I have to invest 25,000 a month, for 20 years and get nearly 64,000 a month from the 21st year onwards for the next 16 years!! The income will also keep increasing by 6-7% every year. The investment is eligible for tax deduction under Section 80C. What’s more, the income received will be tax free and the buyer will also get insurance cover of almost 80 lakh. Should I go for this?
Every year, thousands of buyers invest in traditional insurance plans, lured by the triple benefits of tax deduction at the time of investment, life cover during the policy term and tax-free income on maturity. But traditional insurance-cum-investment plans give abysmal returns.
Ask your adviser to calculate the rate of return based on the Internal Rate of Return (IRR) method and you will realise that a typical endowment plan will give you a rate of return between 4% to 5%. Thats even lower than the rate of return provided by PPF or bank FDs.
Traditional plans are not the best way to get insured because they offer insufficient cover. A person earning 70,000- 80,000 a month needs an insurance cover of roughly 1 crore. A term insurance cover of 1 crore will cost a 30-year-old male about 12,000-15,000 a year. But the same cover from a traditional insurance plan will require an annual premium of at least 10 lakh. Going for such a plan would mean putting all other goals and expenses on the back burner. Most endowment plans offer an insurance cover of less than 10 lakh, which is abysmally low.
Insurance cover is the last thing on the mind of the average buyer of traditional insurance plans. His primary objective is the tax deduction under Section 80C. Almost 70% of the total business of life insurance companies is transacted in the last three months of the financial year when millions of taxpayers are trying to invest under Section 80C. But life insurance is not the best way to save tax. Other instruments can achieve that objective in a much better way. For risk-averse investors, there are 5-year bank fixed deposits and small savings schemes such as NSCs and PPF. The interest from fixed deposits and NSCs is taxable so the real rate of return for someone in the 30% bracket comes to 4.9% in case of bank FDs and 5.6% in case of NSCs. But the PPF offers tax-free returns of 8%.
As a general rule of thumb keep insurance and retirement planning as 2 separate things. Buy a pure term plan for risk cover and look for other avenues for retirement planning such as mutual funds, PPF etc. A financial advisor will help you to avoid costly mistakes like investing in endowment plans.
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Sachin Shah is a 30 year old Senior Software Engineer, working at an IT services company in Bengaluru. He and his wife want to plan for their retirement and also want to save for their child's education, wedding and for buying a car.View Case Study