From endowment to term insurance - calculations

[foobarmoo]

I have 14 Jeevan Anand LIC policies of one lac each which mature year after year. Below I have done the calculations of surrendering the current policy and going for a pure term insurance policy.

Premium  Maturity Date    Maturity Amount    PPF returns
3798      2033                217000                 273858
3628      2034                221500                 286447 
3473      2035                226000                 299896
3327      2036                230500                 313865
3091      2037                239500                 318268
2965      2038                244000                 332920
2849      2039                248500                 348563
2742      2040                253000                 365272
2640      2041                257500                 382670
2543      2042                262000                 400845
2451      2043                266500                 419897
2369      2044                271000                 440876
2291      2045                275500                 462943
2218      2046                280000                 486443
                                 ---------               ---------
                                  3297200               5132763

1. LIC returns have been calculated at the rate of 45 rupees bonus per 1000 insured.
2. PPF returns have been calculated at the rate of 8% per annum using the annuity formula as below

Maturity value = Amount paid per year * [ {(1+r)^n - 1}/r ] * (1+r)

Now, I have already paid 3 premiums(commencement year was 2007), so if I surrender the policy I will get 30% of the premium(excluding first year premium) paid, back. The cummulative premium I pay for these policies per year is 44362. So 30% of 2 premiums would be 26617 and I would loose 106469.

Now the term insurance for a 14 lac policy is:
Aegon Religare - 2240 per annum for 25 years.
LIC Jeevan Anmol - 4,435 per annum for 25 years.

But the disadvantage with term insurance is that there is no cover for accidental injuries. So, I can take an accidental insurance policy from National Insurance which costs around rs 40 per one lac insured(I am not sure about this. Have to dig up more). So going with the above premium rate if I take a policy for 14 lacs then I have to pay 560 rupees.

If I take all the above into account then even though I switch from Jeevan Anand to a term policy now I will gain at least 8 lacs(pessimistic figure) in the long run.

Can someone point out any holes in my argument?

 

[rkkarnani]

Insurance in real terms is "Term Insurance". All other are sort of Savings linked Insurance Product.
If one is firmly disciplined he should go for Term Insurance only and Invest balance amount (difference of Premium of other policy vis a vis Term Insurance) in other Fixed Income products like PPF, PO Deposite etc.
The most common problem is that people tend to leave the Term Insurance Policy midway and loose all the advantages. Insurance policy premium becomes higher almost exponentially after a certain age!!!

 

[foobarmoo]

@rkkarnani
Thanks for that but, do you see any mistakes in my calculation regarding moving from endowment to term insurance plan? Do you think it is a good move?

 

[drsambu123]

You are absolutely right. Jeevan anand is not a good policy if u have knowledge in financial jungle. If your age is less than 35-40 you can go ahead with term insurance of your choice and put your remaining money in ELSS mutual funds (if u want to show for IT purpose) or one of the satr rated diversified mutual fund schemes via SIP.. Surrendering Jeeven anand is right decision... like making stop loss in share after buying bad scrip

 

[rkkarnani]

Frankly, I do not know how to do finer calculations( did you account for the 70% amount you are loosing for pre encashment) PPF account is for 15 years and an extention of 5 years is allowed. No idea if you can open again a new account for 15 years.
Anyway here is my view :
Continue to hold Jeevan Anand Policies,apart from the survival benefit it has life cover thereafter also and it continues till age 70 (I think so, not sure,u can check).Also calculate if it is beneficial to convert it to aid Up Policy after paying premiums for 3+ years.
I would suggest that you take a LIC's Amulya Jeevan instead of Anmol Jeevan. Amulya Jeevan is for minimum25 Lakhs and covers life upto 70 years of age. Anmol covers upto 65 years. In my view these 5 years are crucial!!!
I am no expert, hv written as per my thinking.

 

[AW10]

In my view, if you are looking at the feedback on this calculation, then it is important to address the assumptions that u are making.. As far as I understand, from the limited info provided here
1) you are paying approx 44k/14 = 3150 of average premium per lac of cover
2) Interest rate on PPF remains at 8% always
3) You can easily put the differential amount in PPF (without hitting the limits there)
4) You have other investments to fill 80ccc limit of tax exemption.

If my assumption are correct, then I would rework by splitting it in 2 parts
part 1 - what is cost of alternative investment for the period under consideration ? don't
You need to also consider the loss in surrendering current policies.
Depending on how u calculate, user Present Value or Future Value of all cash flow to ensure u are comparing apple with apples.
Part 2 - how much of saving in premium is achieved and what is the return generated on this saved premium by investing in PPF or investing in MFund.

I don't know if you have housing loan / car loan etc or not, otherwise, as you grow, I am sure your liabilities will also increase in next few year. So you will need extra insurance to cover those liablity. In that background, probably, it might be better to continue with these policies for now. If you need to buy addition insurnace then adopt Term Insurance route. In future, explore the option of making them paid-up so that you stop putting fresh money here. And continue to enjoy 80CCC claim on them. (even if they may not look profitable now, but I have a feeling that your loss in sunk premium is not worth the benefits that u will get by investing in 8% PPF route). You can get best from these policies by putting them as collateral and raise fresh capital.. But before that, learn how to get better then 8% return on fresh capital. That is the only way you will be able to beat financial institutions in their own game by your financial smartness.. By having fixed deposit/PPF return, it is difficult to find better returns.

These are just my views. And ofcourse, I have implemented them as well in my personal finance

Happy Investing

 

[praveen taneja]

You are absolutely right. Jeevan anand is not a good policy if u have knowledge in financial jungle. If your age is less than 35-40 you can go ahead with term insurance of your choice and put your remaining money in ELSS mutual funds (if u want to show for IT purpose) or one of the satr rated diversified mutual fund schemes via SIP.. Surrendering Jeeven anand is right decision... like making stop loss in share after buying bad scrip

Bro insurance is never for making money and its purpose is totaly different and as far I know Jeewan Aanand is the best policy so far with any insurance company for advisors and for customers
Jeewan ke ssath bhi aur jeewan ke baad bhi pls read about it thorouly sorry for jumping in this interesting discussion:thumb:

 

[foobarmoo]

@aw10

Thanks for your views. All the things that you mentioned have been taken into account.

3297200 - is the total amount that I will get if I continue with the policy assuming a bonus of 45 rupees per thousand insured. Have not taken loyalty addition into account.

If I surrender the policy I will get 26617 back incurring a loss of 106469(Have paid 3 installments already).

Now let us assume I surrender the policy and go the PPF route from this year onwards till the policy mature date. The last column in the table indicate the PPF returns which sums to 5132763.

So, now, if I surrender the policy I stand to gain 5132763 - 3297200 = 1835563. Now this does not take into account the surrender loss. Taking into account the surrender loss 1835563 - 106469 = 1729094.

Now coming back to term insurance. Let us assume that I take the LIC Jeevan Amulya policy for 25 years. The premium I have to pay for 25 years for a policy of 14 lacs is 2240 per year. Now I have to deduct this from my PPF amount per year. There is no good way of doing this. So, let me see how much I will get if I put 2240 per year in PPF for 25 years . It comes out to be 176858. Now let me deduct this from my saving of 1729094 which turns out to be 1729094 - 176858 = 1552236. To this amount let me add the money I got as surrender value. As I get 26617 as surrender value let me see how much I will get for that amount if I invest it in ppf for 25 years at 8% per annum. It comes out to be 182286. So the savings is 1552236 + 182286 = 1734522.

Jeevan Anand provides accident benefit where as term insurance does not. ICICI Lombard provides accident cover of 20 lacs for 5 years at 12500. So for a policy for 25 years let us assume the premium is (pessimistic) 1 lac. Subtracting one lac from 1734522 - 100000 = 1634522. Still I stand to gain 16 odd lacs from the above.

The only disadvantage I see is that Jeevan Anand provides a life cover past the policy term but again 14 lacs after 25 years will not have much value I guess taking inflation into account. Even if I go for a term policy of 35 years(not 25 years as we have taken into account above) I am sure I will save more money than if I continue with Jeevan Anand.

Your thoughts?

 

[drsambu123]

I fully agree with you. One more idea-Instaed of PPF you can go for NSC which has just 8 years lock in with safety. Interest rate is 8% with half early compunding.. I think it works out to be more gain finally than ppf. ( exact calculation ???) . I am also planning to surrender my Jeecan Anand ( i have paid 5 years premium- still 18 years i have to pay) ( despite 70 % money last in the paid premiums- i.e.30% surrender value) and go ahead with term insurance and diversified equity mutual fund through monthly SIP. Now private players offering very cheap term insurance when compare with LIC.. They have reduced the premium much...
In long run definetly Equity will earn more than Jeevan Annads debt investments..( historically around 4% without compounding-- so called accrued bonus). I need some genuine expert opinion from non LIC/ ULIP agent people....

 

[foobarmoo]

NSC returns are taxable where as PPF returns are not taxable just like LIC returns to the best of my knowledge.