The World of Investments and Money

Friday, December 8, 2006

Which insurance to take!?

There’re many options to chose from in insurance. I’ve always thought of insurance as something that we take away from savings periodically and get most of it back when the insurance period ends. It could be 10 or 20 or any number yrs when the policy terms expires.

Recently I came across another kind of insurance which I think is the best one to take up. It is called term insurance. The idea is that you invest some amount every yr in this insurance. In the event of any eventuality, which basically means if you die before the policy term expires, your dependents get the money you’re insured for. If you outlive the term of the policy, you get nothing.

For an example, for a 28 yr old person, under the popluar LIC, in the 20 yr moneyback policy, if you want to get 1,000,000 moneyback 20 yrs from now, you have to pay a hefty premium of 62,360 per yr for 20 yrs. That comes to a total investment of 62,260*20 = 1,245,200 over a period of 20 yrs. He gets 200,000 back every 5 yrs and the remaining amount plus bonus at the end of 20 yrs. LIC premium calculator

In case he invests the 200,000 he gets every 5 yrs in MFs, at the end of 20 yrs the amount would have grown to 3081400 + 1238340 + 497660 = 4817400. Adding the remaining 400,000 plus bonus he gets at the end it would go upto 5500000 at most. Still much less than what he can grow the money with term insurance and MFs from the beginning.

If the person takes a term policy instead for 20 yrs for insurance of 1,000,000, he has to pay just Rs 2890 a yr. Over a period of 20 yrs, the total amount he has to pay is 2890*20=57,800. He loses this amount if he outlives the policy. It is just a cover for his dependents who get a sum of 1,000,000 if the person dies within 20 yrs.

So what can the guy do? Well, let’s take the difference in the amount he has to pay over 20 yrs for the two policies discussed above : 1245200- 57800=1187400

So he can invest the amount 1187400 into some growth based mutual funds over a period of 20 yrs. He has to invest Rs 59,370 every yr ( or Rs 4948 every month ) for 20 yrs. At the end of the period at the average rate of return of 20% (for long term funds are known to increase at 20% ), his savings from this turns out to be a Rs 12,067,460. That is 1 crore and 20 lakh plus! magic of compounding

So, it seems the best option is to take a term insurance for 20 yrs and invest the rest of money in such funds or other schemes with a good growth history. If anything happens to him in these 20 yrs, he will leave 1000000 for his dependents. Also, the amount he has invested until now would also have grown to some extent. If he outlives the policy, his investments have grown upto 12067460 while he only paid a total of 57800 for term insurance, so he can be sure of a comfortable life for himself and his family whether he lives or dies in 20 yrs!

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