Which investment is better: Insurance Endowment Plan or PPF or Equity Mutual Fund

There are a number of different options available to you when it comes to investment.  In this article, we'll take a look at three of the most popular types of plans: Endowment Plan, PPF and Equity mutual fund.

Endowment plans often have a policy term of more than ten years, and the rate of return earned throughout that time, including various bonuses, has been much lower than that of well-performing equity mutual funds. In the long run, equity mutual funds are able to build a significantly greater corpus than endowment plans or fixed-income vehicles. Equity mutual funds also provide significantly more liquidity than endowment programs. Furthermore, one should maintain their investment and insurance needs distinct at all times. Choose a pure term plan with an amount assured of at least 12 to 15 times your annual salary if you don't have enough life insurance.

Let's calculate and see the result for ourselves. Take any Endowment or Money Back Insurance Plan like for example,  Jeevan Anand.

Jeevan Anand Maturity Calculations

Yearly Premium - Rs. 1.5 Lakhs

Tenure of Policy - 15 Years

Sum Assured -18 Lakhs

Maturity Value  = Sum Assured + Reversionary Bonus (Added every year) + One Time Terminal Bonus

Current Reversionary Bonus(CRB) Rates are - Rs. 41 per thousand Sum Assured 

(Formula for CRB - Sum Assured * Bonus Per Thousand Sum Assured*No. of Years)

Current One Time Terminal Bonus (TB) for this policy - Rs. 35 per thousand Sum Assured for 15 years policy 

(Formula for TB - Sum Assured * Bonus Per Thousand Sum Assured)

Maturity Value = Rs. 18,00,000 + Rs. (41/1000)* Rs 18 Lakhs*15 Years+ Rs. (35/1000)* Rs 18,00,000

= Rs 18,00,000+Rs 11,07,000+Rs 63,000 = Rs 29,70,000

Your family will get a sum assured of 18 Lakhs if you die in between.

Do you know how much is the Rate of Return in Jeevan Anand Policy - less than 5%. Rs 1.5 lakhs per annum at around 4.5% CAGR for 15 years, will get you Rs 29.70 lakhs.

If  you do the same calculation for PPF, you will get around Rs 48 Lakhs in 15 years at 8% CAGR, which is the current rate of interest in PPF. The only advantage in insurance policy can be that you will get the sum assured of 18 Lakhs, even if you die in the first year. It is better to  buy a Term Insurance policy of Rs 50 Lakhs (much more than Rs18 lakhs) by paying a premium of only Rs 7,000 per annum). You deduct the premium and invest the remaining amount of Rs 1.43 Lakhs in PPF or in Equity Mutual Fund, you will get  much more. 

PPF Maturity Calculations

Yearly Premium - Rs. 1.43 Lakhs (at the beginning of year)

Tenure of Policy - 15 Years

Current Interest rate- 8%

Amount after 15 years - Rs 42 Lakhs

Difference of 12.30 Lakhs (42.00-29.70) in 15 years.

Therefore, If the same amount (Rs 1.43 lakhs) is invested in PPF for 15 years, the return would be around Rs 42 lakhs with current interest rate of 8% per annum.

Also, there is option of partial withdrawal available in Jeevan Anand whereas in PPF, one can withdraw partial amount after 6 years.

Equity Mutual Fund Calculations

Yearly investment - Rs 1.43 Lakhs 

No of years - 15 Years

Expected Rate of Return- 15%

Amount after 15 years - Rs 80 Lakhs (approximately)

Difference of  Rs 50.30 Lakhs (80.00-29.70) in 15 years.

Hence, If the same amount (Rs 1.43 lakhs) is invested in equity mutual fund for 15 years, the return would be around Rs 80 lakhs with expected rate of return of 15% per annum.

So, you should never combine your insurance with investment. You will always be a loser. Any insurance agent selling you the endowment plan, please ask him the same calculations. Always buy a pure Term Insurance Plan for insurance and invest in Equity Mutual funds for long term investment and Debt Mutual Funds for short term investment. Equity mutual funds have given an average CAGR of 15% in the last 40 years. There is no reason the same will not happen in next forty years.