Security, along with safe returns

But the returns will be lower than other investment vehicles.

Rahul, a software professional, was confused over where to invest. He shared his confusion with his father.

They zeroed down on an endowment plan, the oldest, return-based plan. It offers both insurance and investment. The policy gives two features, death or maturity benefit. On death of the policyholder, the sum assured and the bonus accrued is paid to the nominee. On maturity, sum assured, bonus accrued and additional bonus is paid to the insured.

Rahul’s father advised him to split the premium as cost of insurance and the investment portion. For a sum insured (SA)of Rs 25 lakh (for a 30-year old), the premium is Rs 94,546 a year.  Assuming the cost of insurance and investment varies every year, as the death cover keeps rising. After taking a careful look at the product, Rahul and his father observed:

• Death benefit will rise annually as the bonus accumulates
• The amount being invested will reduce as the death benefit rises 
• Amount invested at the end of 25 years will return 8.67 per cent (pre-tax) 
• The premiums paid will enjoy tax benefits under Section 80C of the Income Tax Act.

Rahul had heard the best way to build a corpus was by taking a term insurance and a mutual fund scheme.
 

Table 1
Age  (yrs)	DB*  (Rs lakh)	Premium (Rs)	Term Ins  Cost (Rs)	Investment  (Rs)
30	25	94,546	7,300	87,246
40	38.2	94546	10,804	83,742
50	59.95	94,546	16,498	78,048
55	73.75	94,546	20,528	74,018
* DB = Death Benefit

Term insurance is pure insurance, the SA is paid only on death during the policy term. It has no return value. It offers a cover at a very low cost, helps provide a huge security.

Rahul’s father asked him to buy that though it was easy to start a term plan, but could it be sustained later? It is seen that not many term insurance plans survive the chosen term. Why?

• Policyholders are averse to seeing their money not yielding returns
• If the policy lapses, the process of reviving it is very long 
• Since revival is a new contract, the premium may change.

Thus, there is a high probability of the policy not completing its full term.

The best way to invest in mutual funds is via systematic investment plan (SIP). You are participating in the market at every point thus averaging the risks, getting better returns. The average life of an SIP is 3-5 years. Once the market falls, the fund houses are flooded with redemption pleas, the SIPs are discontinued. During this term of 3-5 years, the market has completed a cycle. In January 2008, Sensex was at a high of 21,000, it crashed to 9,000 levels later that year and was up at 20,000 in 2010. The investment in some of the funds are still below their high net asset values (NAVs).
 

Table 2           (Rs)
Total premium Paid	23,63,650
Cost of insurance	3,08,535
Investment	20,55,115
Maturity Amount	73,75,000
* For 25 years

“Human beings operate on greed and fear. They enter the markets when it has risen and move out when it falls. Thus, making no profit or booking losses,” said Rahul’s father.

Rahul now was more clear about all his options. He also noted that an endowment plan gives good returns, backed by security. He could associate to one of his long-term plans, like his child’s education or his retirement, with the added advantage of a rise in death cover to meet the needs of inflation.

“A combination of a term insurance plan and mutual fund may be ideal, but why not an endowment plan? It is more realistic.” Rahul agreed with his father.

The writer is a certified financial planner