When you start earning for your livelihood, you start thinking of savings and investment. First result after duly searching, you will get “buy a life insurance or endowment policy”. What is an endowment policy? You can read my previous post- Term insurance vs Endowment Policy Explained (No Jargon)
But, before you jump in, you need to make sure you’re making a good choice by asking yourself some important questions. Today in this post, I will discuss important aspects of endowment policy or life insurance and why you should not buy it at first.
These questions will help you confidently handle the complication of Life Insurance policies, and also will help you in exploring other investment options. Find out what you need to know to get the most out of your investment journey and make sure that you make better financial strategies for the future.
My personal experience
When I started earning in 2016, my elders and relatives advised me to get life insurance. I’m sure you’ve been in this situation too. So, without much knowledge or research, I went ahead and bought a life insurance plan from LIC, hoping to save some money.
But as I gained more financial knowledge and started investing in mutual funds and stocks, I realized that life insurance doesn’t offer the same returns as investing in mutual funds and stocks, especially over the long term. I will discuss the formula of IRR (internal rate of return) through which anyone can check return on investment before making a decision.
But before we dive into that, let me share a bit about my father who had a whole life insurance plan from SBI Life company, and he had been paying premiums for the last 10 years until I finally decided to close it in 2020. Convincing myself to take this step wasn’t easy, but in the end, I could succeed.
I will tell you, Why I closed my father’s SBI life insurance policy which was like an endowment policy. But, you should also know how to calculate the return on investment on a life insurance or an endowment policy.
Check Internal rate of return (IRR)
It is very important to check IRR on every investment you make, especially when you are buying an insurance policy. It’s a world known fact that insurance policies do not give much returns as compared to mutual funds and few Government schemes like Sukanya Samridhi Yojana.
To know the real rate of interest on your investment, we will use excel formula i.e., =IRR(values)
In the above screenshot, you can see i have mentioned the negative value i.e., -58600 which is yearly premium amount and in negative sign, as it is going out of our pocket.
There is 90000 value after every 5 years as it is money back guarantee scheme in which i get 1,50,000/- after every 5 years, so the net value is around 90,000
Further, in the last column I have entered the return of 21 lakhs (assuming that i will get) and value 0 is when i have to pay nothing. It’s like lock-in period
In the next column, you use =IRR(F3:F28) (initial value to final value) and press ENTER, you will get the answer in percentage automatically. In my case, it is around 7% which is like a FD return for me.
IRR helps in analyzing the potential returns on your investment during the policy’s tenure. It provides an almost clear picture of how much you can expect to receive from your investment in an insurance policy which you can compare with other investment options..
Another advantage is that by calculating the IRR of different insurance policies, you can easily compare their potential returns, you can get and choose the best one for yourself that offers the best value for your money.
Read also: Unveiling the True Interest Rate of Your Endowment Policy
Reasons you should not invest
There could be many reasons which any expert can give you. But, I will tell you the most important thing which I myself learnt from my investments.
- First one, A life insurance or endowment policy can give you a maximum 6-7% return and many are there who offer only a 4-5% return if analyzed through the IRR formula.
- Secondly, if i know how and where to invest like mutual funds or stock market, I would do that instead of buying life insurance at first instant.
- Third point, If i want to invest for my children or for buying a house, I would start a SIP for 15-20 years where i can easily get 12-15% returns (returns here are only assumptions from the past performance)
Hence, you should think many times before making any investment and for your future.
How you should plan your investment
As per my opinion and experience of investing, I would prefer an ordered list in the manner you should buy policies and invest:
- First, buy term insurance when as early as possible. It is the cheapest insurance where you get life cover of 1cr with just payment of Rs.10-15 thousand a year.
- Second, go with Health Insurance, it is important to have one as in case of a medical emergency, it will help you from financial burden and won’t disturb your financial goals and savings for the future.
- Invest in the mutual funds or stock market (if you have proper knowledge and research) to gain better returns around 12-15% in a year.
- Create emergency funds for you and your family, in case any emergency comes. Start a recurring deposit for this or you can also make a Fixed deposit and later, break it whenever required.
- Still you want to invest more. You can buy a small life insurance (endowment policy) for 15-20 years where you will get a lump sum amount on maturity which can be used for a child’s higher education or marriage.
This sequence of investment, I think, everyone should follow.
You might be thinking, why have I made an investment in life insurance. I told you it was in my starting days and looking for savings so that i can block some amount every month. It was also needed to save income tax. Later, I started gaining financial knowledge and learned it is like FD which i have taken.
This is the reason – i recommended my father to surrender his whole life insurance policy and take the surrendered value which was around 90% of the invested value. If I see the time of investment, it was like he was getting a negative return on it. So, always check different life insurance plans and investment return (IRR) before making any decision.
Conclusion
I have gained a lot from my personal experience through my six years of investing, but I would always recommend seeking advice from experts, when it comes to managing investments. I believe that consulting a financial expert can help you in developing better investment plans and strategies that work with your salary, expenses, and long-term financial goals.
Financial experts have the knowledge and expertise to analyze the complexities of the financial markets and can help you build wealth for the future.
However, it’s also important to learn that an expert can help you, but it is you who has to decide and make decisions for your future. That’s why it’s equally important to educate yourself about financial and investment plans. By acquiring financial knowledge, you can better understand the advice received from the experts and also ensure that your interests are protected.
