Recently RBI published on article on Indians investment pattern. The pattern shows that 48% select life insurance and PF as their investment instrument. This article to give you detailed analysis on life insurance and how it keeps Indians poor for decades. There another research published from RBI on inflation that highlights “The annual retail inflation rate rose 6.30% year-on-year in May, up from 4.29% in April and sharply above analysts’ estimate of 5.30%. The wholesale price inflation rate rose 12.94%, its highest in at least two decades.” Indians investment pattern by investment instruments is,
- 48% invests in Life insurance and PF
- 17% invests in Gold
- 16% Bank FD
- 11% in Real estate(Land and house)
- 4% in stocks and Mutual funds
- 4% keeps the money in Saving account and hot cash in hand
Do not invest in life insurance. Your life insurance in safety cover, not an investment.
Let us take example of one of the life insurance. The returns may vary by 1% between life insurance. Here we would take LIC LIC Jeevan Anand. Mr Ram, aged 30 years buys LIC New Jeevan Anand plan for 30 years tenure with INR 10 lakhs sum assured. The yearly premium payable would be around INR 39,500 for 30 years. Monthly premium would be around 3300 rupees for 30 years.
Let’s take different scenarios to understand the working of the policy.
Scenario 1: Ram dies in the 15th year of the plan
As per the policy terms, Ram’s nominee would get following death benefits on his death.
Death benefit = sum assured on death + vested simple reversionary bonuses + final additional bonus
Death benefit = 12, 50,000 + 15X50, 000 + 15,000 = INR 20, 15,000
Scenario 2: Ram survives the policy term of 30 years
Ram would get the following maturity benefits for surviving the policy term.
Maturity benefit = basic sum assured+ vested simple reversionary bonuses + final additional bonuses
Maturity benefit = 10, 00,000 + 30 X 50, 000 + 15,000 = INR 25, 15,000
Scenario 3: Ram takes term insurance for 1 crores and invest 2500 in Nifty index mutual funds. Term Insurance + Nifty index funds
Death Benefit : 1 crores from Term insurance.
Maturity benefit : 1.38 crores ( Monthly SIP 2500 for 30 years with 14% expected return rate)
Life insurance returns is 4%. India inflation rate 6%. Nifty historical return is 12%.
You should have financial security for 20 * your family annual expenses. Your family monthly expense is 40,000 rupees , you should take term insurance cover for 1 crores rupees. In case you do not have any savings or assets, take insurance cover for 1 crores. If you already have property of 25 lakhs and 5 lakhs saving in your account, take term insurance for 70 lakhs to protect your family.
Term insurance coverage should be 20x of your annual expenses.
Term insurance comes with multiple option in premium paying. You can pay only first 10 years, 7 years or less than that. So which option to select in premium paying. Use your monthly income to calculate the premium. Your monthly premium should be less than 7% of your income. 5% of your monthly income is ideal scenario. Your monthly income is 30000 rupees, your insurance premium should be 1500 rupees. I have seen people who pay 10,000 rupees monthly premium with 30,000 rupees income. How stupid they are !!
Your insurance premium should be less than 5% of your monthly income.
There are people who take life insurance for all their family members including their newborn. Do not do that financial mistake. Insurance cover only for your family earning member or on whom that family depends on for survival. Not for everyone in the family. Non earning family members, house wife does not require life insurance. Present them gold instead of life insurance policies.
Non earning family members, house wife does not require life insurance. Present them gold instead of life insurance policies.
Do not take insurance policies for your children education and marriage. Do not take life insurance for your 2 years old kid. There are plenty of investment options are available in india. Nifty index mutual funds, stocks, Sukanya Samriddhi Yojana and Gold. Better to take mutual funds and let it grow. That would help your kids education and marriage expenses against 6% inflation rate in india.
Please, Do not take insurance for your children and newborn
Insurance agents use the term “Tax Benefit” to sell their insurance cover. Life insurance is not only option for tax planning. Term insurance and ELSS mutual funds are also part of tax planning. You can invest in ELSS mutual funds and take term insurance cover both. Submit the proofs for tax benefits.
Term insurance and ELSS mutual funds investment has tax exemption
The next question comes to mind is mutual funds are risky and volatile market. Market funds and stock market are risky only if you trading in the market. To create long term wealth, it is best option. You can start invest in Nifty index and Nifty junior index funds for more than 10 years. In downturn in the market only for short time and it would recover. For long term investment and wealth creation, start investing in low expense ratio Nifty index funds.
Not investing in risky investment is biggest risk in your financial plan.
Finally what is best financial option to grow wealth from your monthly income. Your monthly income is 30,000 rupees. Pay 1500 rupees for insurance, 4500 rupees to buy gold. 4500 rupees monthly SIP in Nifty index mutual funds and 4500 rupees monthly SIP in Nifty Junior index funds.
5% on insurance
15% on Gold
15% on Nifty index mutual funds.
15% on Nifty Junior Index mutual funds.
Insurance + Gold + Nifty index + Nifty Junior Index
After 30 years, you would hold half kg of gold and 5 crores cash in your hand with insurance coverage of 1 crores for your family. We reached the end of insurance journey. So now,invest in Mutual Fund + take Term insurance.
The life insurance is to give financial protection to your dependents in your absence. If you don’t have any dependents or have financially well-off parents or huge worth family properties for survival, life insurance does not make any sense to them. There is no life insurance required for them.
No dependents or liabilities, do not think of insurance
Have significant assets: In a scenario where you have built significant assets and have very few or no liabilities, you can skip taking life insurance., Start your SIP with same amount of insurance premium. It will you make you rich
Huge family assets or well settled family, do not require insurance
The premium paid for term insurance policy can be availed as a deduction from the ₹1.5 lakh tax break available under section 80C. Many working professionals take 50,000 rupees yearly premium insurance for tax saving. That is no necessary. We can utilize the 80C deduction through PPF, ELSS, housing loan, etc instead of buying insurance even if your family does not need it.
PPF, ELSS does better than insurance in saving tax.
Mutual Fund + Term insurance. Take Smart Decisions.
Life insurance makes Insurance company rich, not you