Should you invest in money back insurance policies or mutual funds?

Henil Shah
/ Categories: MF Unlocked
Should you invest in money back insurance policies or mutual funds?

Getting insured is essential, but people in India hold a lot of insurance policies without even checking out if there are other options that may give them better returns. This may be due to the understanding that insurance policies are one of the safest instruments or because your relative may be an insurance agent and to boost his/her confidence you may have bought it, etc. Money back policy is one such policy which is marketed with a stance that you are going to get your money back. So, does it work better than mutual funds? Let’s check it.

 

Let us assume that you are paying a premium of Rs. 9,967 per month for a sum assured of Rs. 15 lakh in a 20-year money back policy wherein on survival of 5th, 10th and 15th policy year, 20 per cent of the sum assured would be paid to you as survival benefit and remaining 40 per cent would be paid at the policy maturity along with simple reversionary bonuses and final additional bonus and premium paying term of 15 years. As a death benefit, your nominee would get the sum assured on death along with the accrued bonuses payable to the nominee irrespective of the amounts paid earlier as survival benefit. Sum assured on death is this case would be higher of 125 per cent of the basic sum assured or 10 times of annualized premiums being paid subject to a minimum of 105 per cent of the total premiums paid as on date of death.

 

So with the above setup you would be paying Rs. 9,967 per month for 15 years and get Rs. 3 lakh as a survival benefit at the end of every 5th, 10th and 15th policy year. At maturity you would get Rs. 17.7 lakh as a maturity benefit along with simple reversionary bonus. Note that in these calculations final bonus and other charges, if any, are not included.

 

Now let's check how mutual funds work with these scenarios. To make a fair comparison we are assuming that you would be investing Rs. 9,497 in liquid mutual funds with average 10-year returns being 7.61 per cent and assume you would receive the same rate throughout the tenure of 20 years and also to make it comparable, we have deducted Rs. 471 per month from the investment which would go as a premium for term insurance plan. So, with this setup, you would invest Rs. 9,497 per month in liquid mutual fund and Rs. 471 per month in term insurance premium. At the end of 20 year you would end up with Rs. 31.06 lakh.

 

So, as we have seen from the analysis that investment in liquid funds give better reward than money back plan. Money back plan Multiple Internal Rate of return (XIRR) of 4.61 per cent while liquid fund generated XIRR of 7.94 per cent. Though, one can look at investment in money back policies if he/she is very conservative, so conservative that they even cannot digest a 0.5 per cent drop in NAV.

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