Life insurance in India, in the years gone by, has mostly been sold by way of harping on the tax benefits. And endowment plans have been the eternal favourites of life insurance agents.

But have individuals ever spared a thought on other tax-friendly alternatives at their disposal, which could actually give them better returns than an endowment plan? An illustration will help us understand things better.

Let us take an individual, 30 years of age, who decides to buy a regular endowment plan. The sum assured for the plan is Rs 1,000,000 and the tenure is 15 years.

As the table above indicates, the individual will have to shell out approximately Rs 65,070 per annum over the entire tenure. This policy will give him a maturity value of approximately Rs 1,684,000. The said returns are calculated at the rate of 10% (according to the best-case scenario) by the insurance company.

The quotation to the individual also shows a return at the rate of 6% in a worst-case scenario, which amounts to Rs 1,278,706. Giving a quotation of two extreme scenarios is a part of the mandatory rules laid down by the Insurance Regulatory and Development Authority (IRDA) to prevent misrepresentation of facts by insurance agents.

But if one were to take a closer look at the returns, they are not at the rate of 10% of the premium (i.e. Rs 65,070) as shown in the illustration, year on year. That is because the returns calculated by the insurance company are actually computed on the amount, net of expenses i.e. after accounting for expenses. The actual returns therefore, work out to approximately 6.55%. Not a very attractive proposition on second thoughts.

The percentage might look reasonable over a longer tenure because of the expenses incurred by the insurance company being spread over more number of years. But individuals might argue that this is life insurance after all and provides for a life cover in case of any eventuality.

To counter this unattractive insurance/investment option, let us take an alternative scenario.

Here, the individual, instead of investing Rs 65,070 in an endowment plan, buys a term plan with a sum assured of Rs 1,500,000 for a tenure of 15 years. The premium works out to approximately Rs 3,600 per annum.

He invests the remaining amount of Rs 61,470 (Rs 65,070 - Rs 3,600) in PPF. The current rate on the PPF is 8%. At this rate, the individual's maturity value after a period of 15 years would be approximately Rs 1,802,564.

This is more than what he would have received on his insurance plan calculated at 10%. And for the insurance company to be able to give him an equivalent return on the endowment plan, it would have to yield a return out of its skin so to speak.

And that's not where the comparison ends. In case of an eventuality if we compare this scenario to the earlier endowment policy scenario, the individual stands to benefit more by buying a combination of a term plan plus investing in a PPF.

Had an eventuality occurred say, in the 15th year after buying an endowment plan, the individual's nominees would have got approximately Rs 1,638,400 (since this a 'with profits' policy, the individual receives more than the sum assured). In 15 years, he would have shelled out Rs 976,050 (Rs 65,070 x 15 years).

But instead, had he invested in a term plan plus a PPF, the beneficiaries would still have got the sum assured of Rs 1,500,000 on the term plan. But in addition, they would also have inherited the maturity amount on the PPF to the tune of Rs 1,802,564, which would have matured by the end of the 15th year-end.

That is considerably more than what the nominees would have got had the individual invested all his money in an endowment plan. This was possible only because insurance needs and investment needs were separated and both fulfilled their roles to the hilt.

One might argue that the above calculations have been computed based on 'probable return' figures/percentages. One might also argue that PPF returns are not guaranteed at an 8% rate throughout its tenure and that they are subject to fluctuations. That point is taken. But we have a similar scenario even with life insurance.

Gone are the heady days of high assured returns on life insurance policies. The returns on life insurance policies depend on how well the company manages its finances. And even if we were to take a scenario where we assume PPF returns @ 7%, the PPF would still grow approximately to a healthy Rs 1,652,808. That's almost equal to the 'best-case scenario' in an endowment plan @10%'.

An alternative worth contemplating, isn't it?

(The figures used in the illustrations above are based on those of existing life insurance companies. The costs and returns could vary across life insurance companies.)

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