I remember it quite well. January 26, 2016. India’s 67th Republic Day. After watching the parade telecast on good old Doordarshan, I was basking in the warm winter Sun with my family; enjoying good weather on a holiday in the middle of the week.
Out of nowhere, my brother had an urge to spend the afternoon evaluating our family’s current investments. He asked me for help, but I was in no mood to do so. Playing with my dog vs. crunching numbers was not a tough choice to make! So we both got on with what we were doing.
Suddenly, some 30 minutes later, I heard a loud shriek, followed by a profanity-laced tirade, which then turned into hysterical laughter. Wondering what all the commotion was about, my parents and I rushed inside. My brother noticed us gathered around him, took a deep breath, and started to explain something rather disconcerting.
He pulled out the policy document for the endowment plan he had just signed up for a week ago. Our insurance agent, who has been our adviser for the better part of two decades, had offered it to him as the best of both worlds – a policy with significant insurance cover, as well as a solid investment with a sizeable maturity benefit.
The endowment policy 1 offers a Basic Sum Assured of Rs. 50,00,000. The premium for the policy is about Rs. 24,400 per month (Rs. 2,92,800 annually). Over the 20-year term of the policy, he would end up paying Rs. 58,56,000. According to the agent, he can expect the Maturity Benefit to be around Rs 1 crore, which is close to double his investment!
This sounded very appealing when he signed up for the policy, and since our agent was an old hand, he didn’t think about it too much. But he started having doubts within a couple of days, and took the opportunity of the holiday to do some background research. It also helped that all insurance policies in India have a mandatory Free-Look Period of 2 weeks, within which a policy can be cancelled with essentially no penalty. If he was having second thoughts, now was the time to act.
I will never forget what he told me next. He found that a comparable term insurance cover 2, which is essentially life insurance without a maturity benefit, of Rs. 50,00,000 Basic Sum Assured with a 20-year term would cost him about Rs. 400 per month (Rs. 4,800 annually). This would add up to Rs. 96,000 over 20 years, already a savings of Rs. 57,60,000 compared to the endowment plan. This wasn’t even the best insurance option out there!
But where it really gets crazy is this. If he took those monthly savings of Rs. 24,000 and invested them elsewhere as an SIP, even the most conservative instruments would give him returns well over the endowment policy.
A quick online calculation 3 shows that a Recurring Deposit (i.e. a Fixed Deposit with monthly investment) of Rs. 24,000 per month made over 20 years at a (historically reasonable) annual rate of 8% would yield Rs. 1,41,37,000. This is already an improvement of more than 41% in returns (compared to Rs. 1 crore), and we’re talking about the safest investment in existence! So in addition to being incredibly expensive insurance, this policy was a non-starter as an investment. “Best of both worlds!” the agent said. My foot.
He then decided to check what returns he could expect if he instead invested that money in stocks, whether directly or through mutual funds. Both avenues carry short-term risk, but have consistently produced the highest returns over longer periods.
To evaluate stocks, he chose the popular NSE Nifty 50 Index. Since he isn’t a fortune teller, he checked historical data for the index 4, and found that it had an annualized growth rate of 11.65% over the last 20 years. So if he invested Rs. 24,000 monthly in Nifty stocks in the same proportion as the index, his investment would be valued at Rs. 2,11,67,310 after 20 years; *an enormous 112% benefit! *He also pointed out that these 20 years included both the dot-com crash of the early 2000s, as well as the market turmoil of 2008 that was felt around the globe! Despite the volatility, a diverse stock portfolio is a significantly better investment.
For the kicker, he picked two mutual funds and tracked their data for the last 20 years. He picked Tata Balanced Fund 5 (which invests in both, equities and lower-risk debt instruments) and Franklin India Prima Plus Fund 6 (which carries only equity), two funds that have been around for over 20 years and have given terrific returns of 17.90% and 22.68% over the last 20 years. In this case, respectively, his monthly investment plan gives him a yield of Rs. 4,51,80,620 and Rs. 8,35,89,360. I don’t think I need percentages to illustrate my point anymore.
My mind well and truly boggled, I let out a loud shriek, followed by a profanity-laced tirade, and broke into hysterical laughter.
- The endowment plan considered is LIC’s New Jeevan Anand (Plan No. 815). The premium was calculated at http://goo.gl/9TUDAr and the maturity benefit at http://goo.gl/ZjA9bo. The calculation is for a non-smoking 29-year old male seeking Basic Sum Assured of Rs 50,00,000 and a policy term of 20 years.
- The term insurance plan compared is ICICI Prudential iProtectSmart Life, with the same parameters as above. The quote was obtained through https://www.coverfox.com.
- The Recurring Deposit calculation was carried out at http://goo.gl/GnGWfk with a monthly installment amount of Rs. 24,000 and an interest rate of 8% over 240 months, which is a conservative estimate of Fixed Deposit returns over the past 20 years.
- To calculate returns for the NSE Nifty, we retrieved the closing index value of the first trading day of each month from 01/03/1996 to 01/03/2016 from https://goo.gl/95a1Xb. We used this similarly to the NAV of a mutual fund to calculate our investment value, with a monthly SIP of Rs. 24,000 from 01/03/1996 to 29/02/2016, and used the IRR function of Google Sheets/Microsoft Excel to obtain the rate of return.
- The SIP calculation for Tata Balanced Fund – Regular (Growth) was performed at https://goo.gl/cgIiNo with Rs. 24,000 as the monthly investment, 01/03/1996 as the start date and 29/02/2016 as the end date.
- The SIP calculation for Franklin India Prima Plus Fund – Regular (Growth) was done at https://goo.gl/HLm4DE with the same parameters as above.