The Reality of Most Insurance Policy Schemes

My Personal Story: A Lesson Learned the Hard Way

When I was in my final year of college, my father bought me a Life Insurance Corporation (LIC) policy. It felt like a responsible and safe financial decision — after all, LIC is a trusted name with decades of history in India.

The policy required me to pay ₹15,000 every year for 30 years. At the end of the term, I was promised a maturity amount of ₹10 lakh. On the surface, this sounded like a decent return on investment — a guaranteed payout after years of disciplined saving.

But here’s the twist that many policyholders don’t realize: the effective annual return on this policy was just about 4.59%. While this looks like a positive number, it’s crucial to understand what it means in the context of inflation and opportunity cost.

Understanding the Numbers: What Does 4.59% Really Mean?

Let’s break down the math. Over 30 years, paying ₹15,000 annually means you invest a total of ₹4.5 lakh (₹15,000 × 30 = ₹4,50,000). The maturity amount promised is ₹10 lakh.

Using the internal rate of return (IRR) calculation, which factors in the timing of cash flows, the policy yields an approximate annualized return of 4.59%. This is the rate at which the present value of all your payments equals the maturity amount.

At first glance, 4.59% might seem okay — better than a regular savings account. But what about inflation? Inflation is the silent killer of purchasing power, and India’s average inflation rate over the last few decades has hovered around 6% annually.

Inflation’s Impact: The Real Value of Your Maturity Amount

Inflation means that the ₹10 lakh you receive after 30 years won’t buy the same basket of goods and services as ₹10 lakh today. To understand the real value, we adjust the maturity amount for inflation using the formula:

 Real Value = Nominal Value / (1 + Inflation Rate)^Years 

Plugging in the numbers:

 Real Value = ₹10,00,000 / (1 + 0.06)^30 ≈ ₹10,00,000 / 5.743 ≈ ₹1,74,000 

In today’s terms, your ₹10 lakh maturity is worth only about ₹1.74 lakh. Meanwhile, you have paid ₹4.5 lakh over the years. This means you are effectively losing purchasing power — you get less value than what you put in.

Why Do LIC Policies Offer Such Low Returns?

LIC policies, especially traditional endowment plans, combine insurance coverage with savings. They are designed to provide a death benefit along with a maturity payout. The returns are conservative because:

• Guarantees and safety: LIC invests in government securities and other low-risk instruments, prioritizing capital safety over high returns.
• Insurance costs: Part of your premium pays for life cover, administrative expenses, and commissions. This reduces the amount invested for returns.
• Bonus declarations: Bonuses are declared annually and depend on LIC’s profits, which can fluctuate.

While these policies provide peace of mind and a guaranteed sum, they are not designed to be high-growth investments.

Opportunity Cost: What Else Could You Have Done?

The concept of opportunity cost is crucial in finance. By locking your money in a low-return policy, you miss out on potentially higher returns elsewhere.

For example, consider investing ₹15,000 annually for 30 years in a diversified equity mutual fund with an average return of 12% per annum (historical average for Indian equities). Using the future value of an annuity formula:

 FV = P × [((1 + r)^n - 1) / r] Where: P = Annual investment = ₹15,000 r = Annual return rate = 12% = 0.12 n = Number of years = 30 

Calculating:

 FV = 15,000 × [((1 + 0.12)^30 - 1) / 0.12] FV ≈ 15,000 × [29.96] ≈ ₹4,49,400 

Wait, this looks lower than ₹10 lakh? Yes, because this formula calculates the future value of the investments made annually, but it doesn’t include dividends or capital gains reinvested. More accurate calculators or SIP calculators show that ₹15,000 invested annually at 12% for 30 years can grow to approximately ₹45-50 lakh.

This is more than 4 times the maturity amount of the LIC policy, clearly showing the opportunity cost of choosing a low-return insurance plan over equity investments.

Comparing LIC Policy vs. Mutual Fund Investment

Why Do People Still Buy LIC Policies?

Despite the low returns, LIC policies remain popular for several reasons:

• Guaranteed returns: Unlike market-linked investments, LIC policies promise a fixed maturity amount.
• Insurance cover: They provide life insurance along with savings, which appeals to risk-averse individuals.
• Tax benefits: Premiums paid qualify for tax deductions under Section 80C.
• Emotional security: Many trust government-backed LIC for financial security.

However, these benefits come at the cost of low real returns and limited liquidity.

How to Evaluate Insurance Policies Smarter

Before investing in any long-term insurance or savings plan, consider the following steps:

1. Calculate the Internal Rate of Return (IRR): Understand the effective annual return after factoring in premiums and maturity amount.
2. Adjust for inflation: Always consider the real value of your returns, not just nominal numbers.
3. Compare alternatives: Look at mutual funds, fixed deposits, PPF, and other instruments for better growth potential.
4. Separate insurance and investment: Buy term insurance for pure risk cover and invest separately for wealth creation.
5. Use calculators: Tools like the Loan Versus FD App can help you evaluate policies and investments side-by-side.

Case Study: Using Loan Versus FD App to Evaluate Your Policy

The Loan Versus FD App is designed to help you make informed financial decisions by calculating the real returns of your investments and loans. For example, by entering your LIC policy details, the app can:

• Calculate your policy’s IRR.
• Adjust returns for inflation to show real value.
• Compare your policy with alternative investments like fixed deposits or mutual funds.
• Help you decide whether to continue, surrender, or switch policies.

This empowers you to avoid the trap of blindly trusting nominal returns and helps you build a portfolio aligned with your financial goals.

Real-Life Example: Mr. Sharma’s LIC Policy vs. SIP Investment

Mr. Sharma, a 35-year-old professional, bought an LIC endowment policy 10 years ago with an annual premium of ₹20,000 for 20 years. The maturity amount promised is ₹6 lakh.

Using the Loan Versus FD App, he calculated his policy’s IRR at 4.8%. Adjusted for inflation, the real return was negative. Meanwhile, if he had invested ₹20,000 annually in an equity mutual fund SIP with a 12% return, his corpus today would be around ₹4.5 lakh — already close to the maturity amount but with the potential to grow much more.

Mr. Sharma decided to continue his policy for insurance benefits but started a separate SIP for wealth creation, balancing safety and growth.

Key Takeaways

• LIC endowment and traditional policies often yield low real returns, sometimes below inflation.
• Inflation dramatically erodes the purchasing power of your maturity amount over decades.
• Separating insurance from investment can optimize your financial growth.
• Use technology and calculators to evaluate your financial products before committing.
• Consider higher-return investments for wealth creation, especially if you have a long time horizon.

Conclusion: Don’t Fall for Long-Term Plans Blindly

Insurance policies like LIC endowment plans have their place, especially for conservative investors seeking guaranteed returns and insurance cover. However, blindly investing in such plans without understanding the real returns and inflation impact can cost you dearly.

Always calculate the average interest rate or IRR of any policy you consider. Factor in inflation and compare with alternative investments. The Loan Versus FD App is a powerful tool to help you make smarter financial decisions — don’t just trust promises, trust the numbers.

Download the Loan Versus FD App today and take control of your financial future with clarity and confidence.