We could see many Indians take life insurance(LIC) and decides that it is an investment. Investment means money grows by investing. In LIC, money is growing 4-5% annualized interest. It is less that fixed deposit. We agree that life insurance provides risk cover for the loved one or protection plan for family. But do not ever consider that as investment and do not pay huge monthly premium on life insurance.
Let us take an example. If 30 year old person takes life insurance for 30 years with sum assured Rs 1000000.(Ten Lakhs)
Monthly Premium : 3061 (for 30 *12 months)
Sum Assured (A) : 1000000 ( 10 Lakhs)
Bonus (Approx) : 2568000 ( 20 Lakhs)
Total Maturity (A+B) : 3568000( 35 Lakhs)
But if takes on example of same amount in SIP for 30 years.Monthly SIP on Mutual Fund : 3000 rupees monthly SIP (for 30 *12 months)
If the invested in mutual funds 3000 rupees monthly and gets 15% annualized growth,
Expected Amount Rs. 21457061 (2.1 Crores)
Amount Invested Rs. 1101960 (11 Lakhs)
Wealth Gain Rs. 20355101 (2 Crores)
If the invested mutual fund gets 12% annualized growth,
Expected Amount Rs. 10805066 (1.1 Crores)
Amount Invested Rs. 1101960 (11 Lakhs)
Wealth Gain Rs. 9703106 (97 Lakhs)
If the invested fund performance average 8% annualized growth,
Expected Amount Rs. 4592404 (45.9 Lakhs)
Amount Invested Rs. 1101960 (11 Lakhs)
Wealth Gain Rs. 3490444 (34.9 Lakhs)
Just compare the returns of each of that instruments. Consider the average growth 8% growth, it returns 45 lakhs. But same premium ,we get 35 lakhs in LIC. So as far as concern LIC is a not a good investment. Do not ever take LIC for investment propose.
Do not fall in Traditional Life Insurance to reach your goals. It is not designed for your goals.
LIC is a risk cover and protection plan. So consider traditional life insurance policy to provide risk cover. Fine!! How much premium we can pay for life insurance? You can allocate 3%-5% of your monthly income for life insurance premium. Not more than 5%. Decide 3% or 5% based on sum assured. Sum assured should be your one year annual income.
Allocate 3%-5% of your monthly income in life insurance. Not more than 5%.
Do not ever think you can become rich by investing in LIC:
You can’t become rich by taking policy in LIC. It gives maximum 5% interest. If your money is growing with 5%, it can’t even match the inflation rate. Do not ever plan financial goal by LIC.
LIC is an investment at 1950. Not now !!
The fact is that the times when 4% returns from LIC were good(1950s to 1980s) are long gone. With inflation running 9% for a decade, LIC plans have been a big value destroyer for most. Unfortunately, it takes 2 decades for you to realize that you have lost money on LIC investment. Don’t fall in trap by “your money grows 4 times in 20 yrs…..6 times in 30 yrs, etc”. Calculate the interest and decide. Mutual funds, RD are giving more than that.
Traditional life insurance(LIC) is one of the tax savings option. not an only option.
Indian government exempt 1.5 lakhs from income tax for investment in 80C. Most of the people takes LIC for more than 50 thousand yearly premium only for tax exemption. If you are also in that assumption, you have to understand exemption in 80C investment.
Under Section 80C, the maximum tax exemption limit is Rs 1.5 Lakhs per annum. The various investments that can be claimed as tax deductions under section 80c are listed below;
PPF (Public Provident Fund)
EPF (Employees’ Provident Fund)
5 years Bank or Post office Tax saving Deposits
National Savings Certificates (NSC)
ELSS Mutual Funds (Equity Linked Saving Schemes)
Children’s Tuition Fees
Life Insurance Premium
Sukanya Samriddhi Account Deposit Scheme
SCSS (Post office Senior Citizen Savings Scheme)
Repayment of Home Loan (Principal only)
Stamp duty charges for purchase of a new house
| Investment | Risk Profile | Interest | Guaranteed Returns | Lock-in Period |
|---|---|---|---|---|
| ELSS funds | Equity-related risk | 12-15% expected | No | 3 years |
| PPF | Risk-free | 8.1% | Yes | 15 years |
| LIC | Risk-free | 4-5% expected | yes | Policy tenure |
| NSC | Risk-free | 8.1% | Yes | 5 years |
| FD | Risk-free | 7-9% expected | Yes | 5 years |
| ULIP | Equity-related risk | 8-10% expected | No | 5 years |
| Sukanya Samriddhi | Risk-free | 8.6% | Yes | 21 years |
| SCSS | Risk-free | 8.6% | Yes | 5 years |
In these list, people are more interested in life insurance premium for 80C deductions. Particularly State and central government employees takes only LIC for 80C as it has been told by insurance agents. 80C deduction available for other smart investment such as mutual fund investment(ELSS), Sukanya Samriddhi Account Deposit and others.
ELSS mutual funds are investment as well as tax saving by 80C.
Finally we discussed on why LIC should not be considered as investment and what other investment avenue for indian citizens. Do not consider LIC for tax saving benefit. There are other instruments to save tax. LIC is not an option for investment or tax saving. But it is family protection and risk cover. Take it only for that by allocating 3% – 5% of your monthly income. For better safety and high coverage consider splitting your 5% income into Term Insurance and traditional life insurance. Read Term insurance blog for more information on Term insurance.
Split your 5% income into Term Insurance and traditional life insurance.
Happy Planning for your loved One.