DSIJ.in JULY 22 - AUG 4, 2019 I DALAL STREET INVESTMENT JOURNAL (^133)
MF page - 05
entitled for revisionary bonus on maturity for survival on every
policy year completed. We have assumed revisionary bonus of 45
per thousand sum assured or 4.5 per cent (This is the 5 year
average revisionary bonus of LIC endowment schemes). So, with
this, at the end of 20 years, Ravi receives sum assured of 12 lakh along with revisionary bonus of10.8 lakh. With this, the XIRR
comes to around 4.38 per cent.
Now, let's check how Karan's investment does. In case of
Karan, he gets the term plan for 20 years with premium of
4,560 to be paid annually and the remaining65,940
to be invested. Assuming that Karan invested in the worst
performing ELSS, at the end of the tenure, he is getting
27.11 lakh post LTCG tax and that turns out to be XIRR of 6.45 per cent, which is 2.07 per cent higher than the endowment policy. This might not be fair as endowments are not market-linked and usually invest in the money market. So, to make it a fair comparison, we assume that Karan invests65,940 in liquid
funds. Even after investing in liquid funds, at the end of the
tenure, Karan was able to get 28.26 lakh and XIRR of 6.80 per cent post tax. We have taken the average returns generated by liquid funds to arrive at these returns. Here we can clearly see that mutual funds again score over endowment plans. You can see average returns of the liquid funds are better than the worst performing ELSS. Investment Type Investment Value ()
Maturity Amount
Post Tax () XIRR (%) Endowment Plans 14,10,000 22,80,000 4.38 Worst Performing ELSS 14,10,000 27,11,000 6.45 Liquid Fund 14,10,000 28,26,000 6.80 Money Back Plans vs Mutual Funds Money back plans are those that pay back a percentage of sum assured to policyholder periodically (ideally every five years) on survival of the policyholder, provided that policy is in force. Money back plans are not market-linked such as ULIPs or mutual funds. However, like endowment plans, these plans have monetary benefits. People usually get attracted towards these schemes as these not only provide you with life cover, but also pay back the money on every surviving period. This seems to be a better deal than mutual funds, right? Let's continue with our illustration. Illustration: This time Ravi was very anxious and was searching for some better insurance policies to beat Karan's return from mutual funds. So, he came up with money-back policy, which would pay him money back at pre-determined intervals. Here, we have assumed the policy term to be 20 years for which the premium of93,700 is paid annually up to 15 years for sum
assured of 12 lakh that gets bonus of 3.9 per cent for every policy year. In this course, Ravi would be getting 20 per cent of sum assured every 5 years of survival and at maturity he will get the remaining 40 per cent of the sum assured along with revisionary bonus. So, Ravi is getting2.4 lakh on 5th, 10th and 15th policy
year and at maturity he is getting 14.16 lakh, which also includes bonus of9.36 lakh and this brings its XIRR to 4.57 per
cent.
On the other hand, Karan is still heading strong with mutual
funds and, to make it fair, Karan takes term insurance of
12 lakh by paying a premium of 4,560 per year for 20 years
and remaining amount of 89,140 is invested in worst performing ELSS. Karan also withdraws2.4 lakh in the 5th,
10th and 15th year. On completion of 20 years, Karan ends up
having 20.00 lakh with XIRR of 7.27 per cent and that too post-tax. Now you may be wondering this is not a fair comparison. So, to make it fair, we assume that Karan invests89,140 in liquid
fund. Karan withdraws 2.4 lakh in 5th year and 2.41 lakh
each in 10th and 15th year. The higher withdrawal in the 10th
and 15th year is to adjust for LTCG Karan has to pay. Therefore,
at the end of 20 years, Karan ends up with 16.66 lakh with XIRR of 6.09 per cent post tax. This clearly indicates that mutual funds are better than money back plans as well. Investment Type Investment Value ()
Maturity Amount Post Tax
(`) + Money Back
XIRR (%)
Money Back Plans 14,05,500 21,36,000 4.57%
Worst Performing ELSS 14,05,500 27,20,000 7.27%
Liquid Fund 14,05,500 23,88,000 6.09%
Conclusion
From the above illustration, we can clearly see that mutual
funds are a better investment option than life insurance,
irrespective of which type of insurance product you chose. So,
it is always better not to make life insurance as a part of your
investment portfolio. Rather, it is a good idea to segregate life
insurance and investment. Let life insurance do its individual
job of covering your life and let mutual funds do the job of
investing. Even a mutual fund that comes with insurance has
its own cons.
However, people who are not disciplined while investing and
are way too emotional with the fall in their portfolio value can
consider investing in life insurance and make it a part of their
investment portfolio. Even people who are already adequately
diversified and wish to explore other assets and diversify their
portfolio even further can also consider life insurance as an
investment option.
However, if we compare life insurance as an investment option
with other investments like mutual funds, then it is better not
to include life insurance in your investment portfolio.
martin jones
(Martin Jones)
#1