Saturday, December 27, 2008


The insurance is a product which ensures safety and security of persons. The importance of insurance is unparalleled in its effectiveness in time of distress. No other product can replace its worth in gold at any time. I have always recommended that the main wage earner of the house hold must insure himself to protect his dependents from the economic distress in case he ceases to exist suddenly. How much should be insured and when insurance should start? These two questions have been asked repeatedly by friends, relations and wage earners repeatedly now days. No fixed amount can be recommended for Life insurance. It would depend on the person who wants take a policy to protect his dependents. It is generally dependent on his income and on his capacity to spare money for a longer time. But taking thumb as a rule a person can take an insurance policy five time of his gross annual salary, if he can afford. For example if a persons gross annual income is Rs. 20,000/- then he should insure at least for Rs 1 lakh . Insurance is a great product for safety and security of the family. But it is not a product of investment.

Recently many insurance companies have introduced a new guaranteed return product. The insurance companies have tried to attract & lure investors from investment products as the equity market is in doll drum They have introduced guaranteed return product with insurance benefit, tax benefit and tax rebate facility under section 80 C of IT act. But the companies have not really spoken out the full truth on the rate of returns. The subscribers to such a policy should be educated fully by the insurance advisors about the implications of such product. It is a good product no doubt but those persons who want to take these policies must take an informed decision before subscribing these insurance product.

Insurers Compounded return (after tax) % Single premium
In Rs. Maturity benefit Benefit on death
Religare 7.20
50,000/- Rs. 1,00,211 2..5lakh
IDBI Forties 6.85 51,000 Rs. 1,00,000 2.57845
Aviva 7.00 1,00,000 Rs. 1,96,715 5, lakh, first year, less later years.

LIC Jeevan Astha 7.40 48, 975 Rs. 1,00,000 3lakh first year Rs 1 lakh later years

From the table above you can notice that the best return comes from Jeevan Astha. (Closing in January) The return is 7.40 %.( without tax) No doubt from the point of view of insurance product it is a good return. It is just above the present rate of inflation of 6.80% which is expected to come down further. Yet the PPF provides still better return of 8 %.( without tax) The guaranteed return in the insurance product doubles up only in 10 years. Only saving grace is the insurance benefit. But in this case also the real monetary benefit would be available during the first year only. On the later years benefit is equivalent to insured amount only. It would much more appropriate to take a Termed Insurance and subscribe to PPF for better guaranteed returns.

The LIC has advertised with great hype that Jeevan Astha policy would provide guaranteed return of10 %. But when you calculate, taking into account tax free elements, the return reduces to 7.40 %.This fact needs to be told to policy holder. How good is this guaranteed return policy as insurance product? These products are meant for shorter duration of five years and ten years so it is not very alluring unless some one dies either in accident or of sudden illness like heart attack or renal failure. The pre tax benefit is higher but after deduction of tax it comes down substantially as shown in the chart.

Among all the guaranteed Insurance product LIC’s Jeevan Astha could be a better product. But it would always be better to take either PPF with term insurance. However the best bet would be to subscribe to ELSS for it had given a return of 14.39%. even in worst period of last17 years. If you can face risk take ELSS. Other wise PPF with term insurance or subscribe to guaranteed product of Insurance. Choice is yours.


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