Introduction: The Popular Policy Plan Under the Microscope
Imagine a policy where you pay ₹1,00,000 every year for 10 years, and after a waiting period of 1 year, you receive annual payouts ranging between ₹80,000 and ₹1,02,000 for 15 years. Additionally, the policy promises a bonus payout of ₹11,00,000 at the end of the term. Sounds like a lucrative deal, right? Many people see this as a secure, long-term investment combining insurance and returns.
However, as with all financial products, the devil lies in the details. What does this policy really return when we analyze the numbers carefully? And how does it stack up against other investment options such as mutual fund SIPs or fixed deposits (FDs)? Let’s dive deep.
Breaking Down the Policy: Payments and Payouts
To understand the policy’s real worth, we need to first clarify the cash flows:
- Investment Phase: You pay ₹1,00,000 annually for 10 years — a total outflow of ₹10,00,000.
- Waiting Period: 1 year with no payouts (policy is maturing or vesting).
- Payout Phase: You receive between ₹80,000 to ₹1,02,000 every year for 15 years.
- Bonus: An additional lump sum of ₹11,00,000 at the end of the payout phase.
At first glance, the policy seems attractive because it provides a steady income stream plus a sizeable bonus. But is this enough to beat inflation and other investment options? Let’s analyze the returns.
Calculating the Internal Rate of Return (IRR)
The key metric to evaluate any investment is the Internal Rate of Return (IRR) — the annualized effective compounded return rate that makes the net present value of all cash flows (both positive and negative) equal to zero.
Using the Loan Vs FD App, we input the cash flows:
- Years 0 to 9: Outflow of ₹1,00,000 each year
- Year 10: No payout (waiting period)
- Years 11 to 25: Inflow of ₹80,000 to ₹1,02,000 each year
- Year 25: Additional bonus inflow of ₹11,00,000
The app computes the IRR for both the lowest and highest payout scenarios:
| Payout Scenario | Annual Payout (₹) | Bonus (₹) | Calculated IRR (%) |
|---|---|---|---|
| Lowest Payout | 80,000 | 11,00,000 | 5.19% |
| Highest Payout | 1,02,000 | 11,00,000 | 6.25% |
These IRRs are modest, especially when compared to historical returns from equity mutual funds or even some fixed deposits.
Why Do These Returns Seem Low?
The policy’s structure — paying premiums upfront and receiving payouts much later — means your money is locked and grows slowly. The bonus payout, while seemingly large, is received far in the future, reducing its present value.
Moreover, the payouts are fixed, which means inflation will erode their real purchasing power over time. A 5-6% nominal return might translate to 2-3% or less in real terms after adjusting for inflation.
Comparing With Systematic Investment Plans (SIPs)
SIPs in mutual funds have become a popular investment route for retail investors in India. They offer the benefit of rupee cost averaging, liquidity, and the potential for higher returns due to equity exposure.
Let’s compare the policy plan with a SIP of ₹1,00,000 per year for 10 years, followed by systematic withdrawals for 15 years, mimicking the policy’s payout phase.
Assumptions for SIP Comparison:
- Annual SIP amount: ₹1,00,000 for 10 years
- Average annual return: 12% (historical average for diversified equity mutual funds)
- Withdrawal phase: 15 years, withdrawing an amount equivalent to the policy’s payout each year
- Portfolio continues to grow at 12% during withdrawal
Using the Loan Vs FD App’s SIP calculator, the results show that the SIP investment grows significantly larger than the policy’s total payout, even after systematic withdrawals.
Why Does SIP Outperform?
- Higher Returns: Equity mutual funds historically deliver higher returns than traditional policies.
- Liquidity: Your money remains invested and accessible; you can adjust withdrawals as needed.
- Control: You decide when and how much to withdraw, adapting to your financial situation.
- Lower Costs: Policies often have hidden charges, commissions, and penalties that reduce returns.
Visualizing the Comparison: Policy vs SIP
Below is a simplified cash flow comparison over 25 years:
| Year | Policy Net Cash Flow (₹) | SIP Portfolio Value (₹) |
|---|---|---|
| 0-9 | -1,00,000 per year | Growing with 12% returns |
| 10 | No payout | Portfolio peaks |
| 11-25 | ₹80,000 to ₹1,02,000 inflow + ₹11L bonus at 25 | Systematic withdrawals; portfolio continues to grow |
The SIP portfolio value often remains higher than the total payouts from the policy, providing greater flexibility and potential wealth accumulation.
Risk Considerations: Policy vs SIP
While SIPs offer higher returns, they come with market risk — the value of your investments can fluctuate. Policies, on the other hand, provide guaranteed payouts (subject to insurer solvency and terms), appealing to conservative investors.
However, the guarantees often come at the cost of lower returns and reduced liquidity. Additionally, many policies have surrender charges or penalties for early withdrawal, which can further erode returns.
The Loan Vs FD App helps you weigh these trade-offs by simulating different scenarios and showing you the numbers transparently.
Inflation’s Impact on Your Investment
Inflation is the silent killer of returns. A nominal return of 6% can translate to a real return of just 2-3% after adjusting for inflation, which averages around 4-5% in India.
Policies with fixed payouts are especially vulnerable because your income stream does not increase with inflation, reducing your purchasing power over time.
SIPs, with their equity exposure, have historically outpaced inflation, preserving and growing your wealth in real terms.
Why Use Loan Vs FD App Before Investing?
Many investors buy policies based on emotional appeals, agent persuasion, or incomplete information. The Loan Vs FD App empowers you to:
- Input actual policy details and cash flows
- Calculate IRR and compare with alternative investments
- Visualize the impact of inflation and time on returns
- Make informed decisions based on data, not just promises
This approach helps avoid locking money into low-return products and encourages smarter allocation of your financial resources.
Real-World Example: Mr. Sharma’s Investment Decision
Mr. Sharma, a 35-year-old salaried professional, was considering a traditional endowment policy promising similar payouts as described above. Before committing, he used the Loan Vs FD App to analyze the policy against a SIP in a diversified equity fund.
The app showed the policy’s IRR at around 5.5%, while the SIP’s expected return was 12%. Even after systematic withdrawals, the SIP portfolio remained larger and more flexible. Mr. Sharma chose the SIP route, which over 20 years grew his corpus significantly, allowing him to fund his children’s education and retirement comfortably.
This example highlights how informed decisions can dramatically impact your financial future.
Summary: Key Takeaways
- Traditional policies with fixed payouts often deliver modest returns (5-6% IRR), which may not beat inflation.
- SIPs in equity mutual funds typically offer higher returns (~12% historically), providing better wealth accumulation and flexibility.
- Liquidity and control are important—policies often lock your money with penalties for early exit.
- Inflation erodes fixed payouts, making inflation-beating investments essential for long-term goals.
- Use tools like Loan Vs FD App to analyze investments thoroughly before committing.
Additional Resources
Conclusion: Make Numbers Your Guide
Financial products like insurance policies can be confusing with their complex terms and promises. However, by breaking down the numbers and comparing them with alternative investments, you can avoid common pitfalls.
The Loan Vs FD App is designed to bring clarity and transparency to your investment decisions. Whether it’s a policy, SIP, FD, or loan, understanding the true returns and risks helps you build a secure financial future.
Before you lock your money away, take a moment to calculate, compare, and visualize your options. Your future self will thank you.
Download the Loan Vs FD App today and start making smarter financial decisions.
