Contrary to the popular belief that they solve both purposes, such policies are neither good insurances nor good investment products.
"Insurance and investments are two separate things solving two different purposes. The former covers financial risks, while the latter helps you create wealth. And, mixing the two is a major mistake," said Renu Maheswari, certified financial planner and Sebi registered investment adviser, CEO and principal advisor, Finscholarz Wealth Managers.
Let’s understand this theory with some relevant examples.
The coverage amount for life insurance policies with maturity benefits, like moneyback policies, endowment policies, retirement policies etc., is 10 times its premium amount. That is, if you have a ₹20 lakh life insurance cover (with maturity benefit), your yearly premium would be ₹20,000. On the investment side, such products provide 3% to 4% interest rate, which is more or less the same as savings bank account.
For example, say you buy a ₹50 lakh endowment policy for 20 years. Yearly, you pay a premium of ₹50,000. And on average, at the end of 20 years, you will get ₹14.7 lakh (at a 4% interest rate) against the policy. "The combination of products becomes extremely expensive, returns are low and any money lying in an endowment policy for such long at such a low return is a disaster," Maheswari explains.
Now, there is a smarter move that you can make with the same amount of money. And to make it more relatable, let’s consider a few essential factors. Say, you are a 30-year-old individual; your current life insurance requirement is ₹50 lakh; you plan to spend exactly ₹50,000 for your investment and insurance.
First, for the life insurance cover, you buy a term plan. "It is always better to go with term insurance for risk management. It is reasonably priced and you can actually afford to buy a high cover plan," Maheswari said.
On average, the yearly premium amount for a ₹50 lakh term plan cover would be ₹6,000. Now, the rest, i.e. ₹44,000, you invest in a product that provides you a 7% interest rate. At the end of 20 years, you will get nearly ₹20 lakh for the same investment.
"You can invest as per you financial goal, lifestyle and income considered," adds Maheswari.
So if you compare among the two scenarios, for buying a term plan along with having a concrete investment plan your net gain is higher than going for a life insurance product with a maturity benefit.
Despite all its advantages, term insurance has always been treated as a stepchild in the life insurance world. This is mostly because they do not come with any maturity benefit.