Almost every household in India has an LIC payback policy. Our parents must have bought it when we were young and naive enough not to understand anything. Some of us must have bought it because of the disguise of solid returns while others must have subscribed to help our relatives or friends complete their targets. When I was in my teenage years, it used to feel good because of these fixed payback returns – something like invest ₹5,000 per year for ten years and get ₹1,00,000 in lump sum at the end of those ten years. Believe me, it feels really lucrative if we don’t understand the opportunity cost. Although now I am entirely convinced that these are terrible investment products. In my view, most of the payback LIC policies not only don’t give any returns but they reduce the value of our money over time. Today, I will discuss two LIC payback policies where my parents have invested in the last twenty years.
In the first policy, they are investing ₹6,500 per year for 20 years, and at the end of that period, they will get ₹1,70,000. It seems lucrative at the first instant, but when we calculate the returns, it is merely 2.6% cagr throughout twenty years. It is far lesser than the gains that they might have got from FDs.
|Yearly investment||₹ 6.500|
|Amount received||₹ 1,70,000|
|Total cagr returns||2.6%|
If they would have invested the same amount in an FD over that period then at a nominal rate of 7.5% the total amount received would have been ₹3.02 lakhs – almost 1.7 times than the LIC policy.
The total payback would have been ₹5.24 lakhs if the same amount was invested in mutual funds assuming a return of 12%. This is staggering four times more than the LIC returns.
In another policy, we are investing ₹20,000 a year for ten years and will get ₹2.58 lakhs at the end of those ten years. The cagr for ten years comes out to be 4.6% which is again quite less than traditional FDs.
Now, wait I don’t want to be entirely negative against LIC but sincerely want to give it a fair chance. There is another policy that my parents are currently subscribed which seems reasonable. They invest ₹10,000 every year and get around ₹1.60 lakhs after ten years. If we calculate the returns on this investment, it comes out to be 8.5% which is in-line with traditional fixed return bank products.
So does this mean that we should calculate the policy returns and if they are equal or slightly better than fixed deposits then we should invest in them? Personally, I would never do that! For me, the opportunity cost is more important than fixed returns. Traditionally, most of the equity instruments have returned over 12% cagr in the longer term. Some of them have returned 15% while some 18%. I would any day prefer investing in equities rather than an LIC policy! How do you think LIC gives you returns? It takes your money, invests in stock markets, earns huge returns and gives back a tiny piece to you!
I will only buy term insurance which will give the life cover to my dependents in case of death or accident! Policies are meant for protection, not for returns!