Traditional Policy Vs Term plan+MF: Heavy premium has to be paid for large coverage in traditional insurance policy, but if the same amount is invested in term plan and mutual funds, one can get much more coverage and returns.
Traditional Insurance Policy Vs Term plan + MF: Are you also fed up of getting phone calls to sell insurance policies in the month of March, constantly offering you different types of insurance plans? After March 31, 2023, the tax benefit on the maturity amount of insurance with an annual premium of Rs 5 lakh or more is also ending. Therefore, even more calls are coming to sell such expensive plans, in which it is said that this is the last chance to invest in such an insurance scheme.
But should you really invest in such a plan? Before taking any decision in this regard, let us see what is the difference between a high premium endowment plan and a low premium term plan? Along with this, it is also important to know that if you invest only the money invested in the premium of the endowment plan by dividing it into a combination of term plan and mutual fund, then how much return can be received on it.
Endowment Plan VS Term Plan
Endowment plan means such an insurance policy in which you get insurance coverage as well as maturity benefit on service. That is, after the end of the policy term, a lump sum amount is also available on the survival of the insured person. According to the coverage in this plan, the premium has to be paid very high.
In such a situation, taking a bigger coverage in an endowment plan becomes very expensive. On the other hand, only life coverage is available in pure term plan, but nothing is available on maturity benefit on survival. This is the reason that the premium in term plans is very low, due to which taking a huge coverage also becomes affordable.
What is the right strategy for coverage + returns?
There is an attraction of return on investment in endowment plans. This is the reason why most people who get insurance in the country invest money in it. Insurance agents also get a good commission in endowment plans. Therefore, they are also interested in selling the same and most of the people considering insurance agents as investment advisors invest money in endowment plans only on their advice.
Despite being extremely economical, term plans are less popular due to non-availability of maturity benefits. Insurance agents are also not much interested in selling them. But before taking any decision in this regard, an investor should see which plan is more beneficial for him.
The term plan is unmatched in terms of coverage
If you look only from the point of view of insurance, then there is no competition for term plans. Because for a common middle class person, taking an insurance plan with a coverage of Rs 1 or 2 crore is possible only in term policy. To get such a huge coverage in an endowment plan, one may have to pay a premium of lakhs of rupees in a year, which may not be possible for most people.
Despite this, many times people buy expensive endowment plans in spite of low coverage only because they feel that through this, along with insurance, the goal of investment can also be met. But there is a better way to meet the twin goals of insurance and investment. And that is investing in a combination of term plan and mutual funds. The following example will make the whole thing clear.
What is the right plan for coverage of 1 crore?
A 30-year-old non-smoker ie a male who does not consume cigarette-tobacco will have to pay Rs 7,00,882 every year i.e. about Rs 59,652 every month for 15 years for taking LIC’s new endowment plan with a coverage of Rs 1 crore.
There will be very few people who will be able to pay this much premium easily. Still, to make the right investment strategy, let’s understand the benefits of this plan. So for the above mentioned endowment plan, after paying the heavy premium for 15 years, the maturity benefit would be as follows:
- Sum Assured: Rs 1 crore
- Premium Paid: Rs 1,03,01,952
- Bonus : 57,00,000
- Final Additional Bonus : 2,00,000
- Total maturity benefit: Rs 1,59,00,000
If the same coverage of Rs 1 crore is taken as a term plan, the premium will be reduced manifold. For example, the same non-smoking male of 30 years will have to pay an annual premium of just Rs 11,517 for a policy term of 15 years for LIC’s pure term plan ‘Jeevan Amar’. Means only 1000 rupees monthly!
Regularly invest the money left over from the term plan
Compared to an endowment plan, after taking a coverage of Rs 1 crore through a term plan, that person will be left with more than Rs 58,500 per month for investment. If he invests this amount every month through SIP in mutual funds, then after investing for 15 years, he will get a substantial amount. Even on the basis of 8% annual return for 15 years, it will be more than 2 crore 3 lakh rupees. In this, Rs 1 crore 5 lakh 30 thousand would have been given by the investor in the form of SIP, while the remaining amount would have been returned.
If the average annual return is 10% instead of 8%, then after 15 years you will get Rs 2.44 crore. Whereas on getting 12% return, this amount can be Rs 2.95 crore. Getting 8, 10 or 12 per cent returns in mutual funds is not a difficult thing.
Benefits of keeping insurance and investment separate
One advantage of the strategy of investing in term plans and mutual funds by dividing them is that you can easily decide to take a bigger coverage according to the financial security of your family. And then according to the investment capacity, you can take the desired mutual fund.
With the increase in income in future, you can easily increase the investment made through SIP. With age in the insurance policy, the premium increases rapidly, due to which you are at a loss. While there is no such loss on increasing investment in mutual funds. Hence, this strategy also provides you with more flexible options as per your requirement.
