Niveshika: Insurance

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Friday, August 11, 2023

Mutual Funds August 11, 2023

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.

sangam D 0

Friday, October 12, 2018

Insurance October 12, 2018

HEALTH INSURANCE: IS IT IMPORTANT

No one plans to get sick or hurt, but most people need medical care at some point. Health insurance covers these costs and offers many other important benefits. Health insurance protects you from unexpected, high medical costs.

Do we require Health insurance? No, if you are a Govt servant and covered by your organisation, including spouse and children you don't need to worry for self and spouse for the rest of your life. But what about your children? They are becoming adults and soon they will be out of your dependent list. How will they be covered then?? What will you do if they have to be hospitalised? These days hospitalisation is most expensive? Few days of hospitalisation means lakhs of rupees of hospital bill.

So, what should you do? If your children are approaching that magic figure of 25 years, when they will be no more dependent on you. If they join a service where they are covered up, no need to worry. But if they join corporate world and not covered by company then you need to think about it.

Please get a health insurance plan for your child/children before they attain age of 25. The early you do it, the lesser is the premium. And mind you, the premium you have to pay for as long as you want the insurance cover. There are slabs for premium, generally it 5-24 years and then 25-35 years and so on. There is a huge difference of premium between both the slabs. It may be around 20-30%. So, please don't wait till your child attains the age of 25 years. Do it before he completes 24 years. Also, you can avail the benefits of income tax deduction under section 80 D over and above of IT rebate of Rs 1,50,000.00 under section 80 C. That means 30% of savings on premium paid. The annual premium will be between Rs 5,000/- to 8,000/- depending upon the company selected. This is hardly any amount, around Rs 600/- to 700/- per month.

Now most important and confusing aspect of health insurance? How do i choose the policy? You will have to do some hard work. Even if you consult an expert, you need to know about the various benefits of insurance cover. You can also take advice from policybazaar.com or 121policy.com and few other sites which provide online help.

It is difficult to recommend names. every policy will have different features. I will not recommend any names since its a personal choice and understanding. But i can only suggest with my experience that it is beneficial to go for insurance cover of Rs 5 Lakhs. And if you take no claim bonus then you receive an increase of 50 % in your sum insured for every claim free year. That means your sum insured increased to 10 Lakhs for 5 years of no claim. You may get more. it depends from company to company. Compare benefits offered by each company and also their pay out record. In the next article on health insurance, i will discuss about the most important aspects of the health insurance plan that one must look into the policy.

sangam D 0

Friday, October 5, 2018

Insurance October 05, 2018

KEEP YOUR INSURANCE SIMPLE: TERM PLAN Vs MONEY BACK PLAN

If your car insurance premium is Rs 10,000, will you agree to pay Rs 45,000 if the insurance company returned all the premiums after 10 years? Ridiculous as it may seem, this is the logic driving term insurance plans that return the premium to the buyer. The price of a plan that returns the premium is more than double the price of a regular term plan. The company invests the difference and gives it back to the buyer after the policy ends.

INSURANCE

The return of premium plans is just one of the several additions the insurance industry has added to the simple term plan. Instead of plain protection against death, term plans now offer cover against disability and diseases.

RETURNS OF THE TWO PLANS

The math behind return of premium plans show how buyers get deceived

Age : 30 yeras
Term : 30 years
Cover :1 Crore

premium of *regular term plan (Plain Insurance)* : Rs 8,500/-

premium of *return of Premium Plan (Money Back or Endowment Plan)* : Rs 22,500/-

Buyers get back after 30 years : *Rs 6.75 lakhs*

If the difference of Rs 14,000/- (Rs 22,500-Rs 8,500)between the *regular term plan and return of premium policy* is invested every year, in 30 years it will grow to :

At 4% in saving bank account : *Rs 8.25 lakhs*

At 6% in liquid funds : *Rs 12 lakhs*

At 7.9% in PPF : *Rs 17.5 lakhs*

At 10 % in balanced funds : *Rs 27 lakhs*

At 12% in equity funds : *Rs 40 lakhs*

It is absolutely clear from the above example that the buyer would have gained more even if the difference in the two plans idled in a saving bank account. But if the same was even invested in PPF, the buyer would have gained 11 lakhs more. But the best is Investment in Equity Mutual Fund. So, it is foolish to take a money back insurance plan. Instead, take a Term Plan and that too only for the head of the family because if God forbids, something happens to him, the family must be secured financially. There is nothing more absurd than taking insurance plans for children. You don’t require any financial security if anything happens to them. So, please never take any insurance plans for small children. Insured them with simple term plan, when they cross 20, because you will have to pay less premium.

sangam D 0