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While buying life insurance have you ever thought why you are taking insurance? May be not many have done their home work before purchasing. It may be in a hurry to save few bucks of Tax or with the advice of your friend, uncle or neighbor who is agent of some particular insurance company.

But which is best-Term Insurance+Mutual Funds or Endowment Plans?

I will show you with example. Suppose Mr.X want to purchase Insurance plan and looking for the Insurance cover with return.  So, he will go with endowment plans which are the common investments in all persons portfolio (About ULIPs I will explain you elaborately in my future posts, how they are also bad product).

Here I will consider two plans of LIC’s-One is Amulya Jeevan (Pure Term Plan) and Endowment Plan of LIC (Plan No.14). Suppose his age is 30 and he is looking for the cover of 50 Lakh with term of 20 yrs. Then Amulya Jeevan premium is Rs.12,850 and Endowment Plan premium is Rs.2,49,750.

Now if Mr.X took Amulya Jeevan and started to invest the remaining balance i.e. Endowment Plan Premium-Amulya Jeevan premium which is Rs.2,36,900 (2,49,750-12,850) in any well diversified fund for the next 20 years then his investment at the end of 20 years will be 2,61,98,641 (Term-20 yrs monthly 19,741 which is 2,36,900/12=19,741, Interest considered 15% CAGR). But you may ask how I may consider 15% as return over 20 years investment. If you look at the returns of Sensex from Jan 1980 to Octo 2011 it gave around 18% CAGR return.

Suppose Mr.X invested in Endowment Plan and his return at the end will be around Rs.1,35,00,000 (SA-50,00,000+Bonus-60,00,000 60 per 1000 SA per year and Final Additional Bonus if any-25,00,000 at Rs.500 per thousand SA). Which will give you around 8.17% CAGR return (even after considering high values for future predictions like Bonus as 60 Per 1000 SA per year and final additional bonus at 500 per 1000 SA). But if you consider the returns of Private Insurers then it will again dip your return because Private insurers’ returns are less than LIC’s in traditional Endowment Plans as of current trend.

So, by purchasing Term Insurance and diverting the remaining money towards Equity, you can earn more than just investing in normal Endowment Plans. For your information there are so many Term insurance Plans which will cost you less in market today than what LIC’s Amulya Jeevan costs you. But I took LIC’s example because guarantee of return and faith attached with it. LIC proved that with it’s death claim settlement ratio compare to private insurers.

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