Is An LIC Policy The Best Investment You Can Make?

LIC Policies, are they the best way to get started 

LIC policies are so ubiquitous in all our lives that it is well worth discussing here. 

If you have an elderly uncle (let’s face it, we all do) who came around as soon as you started working, to sell you insurance, then you probably own at least one LIC policy.  

In most cases, the whole LIC policy purchase happened in a blur and you just knew that you had done the right thing and bought a policy to secure your family. 

I am no exception, I have owned my share of LIC policies in the past. 

A few years ago in a fit of retirement planning, I ended up investing in a LIC policy.

My policy story

This is not very different from the annuity schemes you will find from other institutions. I have written about comparing returns from annuity schemes here. 

The plan is sound. Start investing now and you will be able to get a monthly income in retirement.  

However, the instruments were not the best suited for the purpose. 

When I purchased this policy, I had not yet started getting into personal financial planning. In fact, the LIC policy was probably the very first bit of actual retirement planning that I did. To that extent, I am glad I did so. It definitely set me on the path to retirement planning and studying personal finance.

The positives 

It got us started on the retirement planning journey. I think this is probably the most important contribution made by the elderly uncles around us. They get us started on the journey of saving and planning for retirement/ investment. 

If not for that initial shove to buy a LIC policy, many of us would have never gotten off the ground on this journey. 

The policies give us a benchmark to compare real returns. 

The downsides

The life cover is paltry. This is the single biggest downside of a LIC policy. It is not adequate insurance. You are led to believe that you are buying life insurance cover to protect your family, but the total cover is a fraction of your annual compensation. This is just wrong. 

Your life insurance needs to be a multiple not a fraction of your annual income. 

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So, while you believe you have done the right thing by buying a LIC policy, in most cases you have not even gotten 1/4^th of the way.

The next worst thing of course is the return. In most cases, LIC policies give you less than inflation return. Basically, this means you are losing money.

In the above case, it makes no sense for me to pay 25K today and ~ 30 years down the line to receive the same amount of money. Inflation would have made it worth less than a fifth by then. In today’s value that is less than 5K rupees. 

Summary of my LIC policy:

I was paying Rs. 25K per month today to get back Rs. 5K per month, 25 years hence. In the 25 years, I was getting an inadequate insurance cover of ~5MM.

The part that was not discussed at all was the income tax. The annuity/pension payouts would be subject to income tax based on the applicable slab rates. That eats into 20-30% of your income. 

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Let me pick up another thorny issue. This might make me more unpopular than is normal with my articles. 

This is the issue of the agent commission. 

That genial uncle who got you to invest in the LIC policy, well, he is also a registered LIC agent. While he might have the absolutely right intentions of getting you started on the path to financial security, he is also handsomely compensated for it. I was quite surprised when I first learned what the commission rates were. 

Hold on tight.

So, for most policies such as annuity, endowment or unit-linked policies the commission is ~ 20-25% for the first year, 7.5% for the next 2 years and 5% from year 4 onwards till the policy is in force. 

LIC agents can earn a significant commission. 

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You can read this article in the Eco-T, if you want to get a sense of how well LIC agents can be compensated.

No wonder, the customer gets paltry returns. Only 3/4^th of the money in the first year went towards my investment 1/4^th of it went to the person who sold the policy.  

In my case, the person who sold the policy would have easily made 600k+ over the term of the policy. Had we followed through and deposited the ~6MM into the pension, he would have made another 120K as a one-time payout. Not bad at all.

Little wonder then that your genial uncle is a very persuasive salesperson. 

Ok, so now we know that the LIC policies might not be the best way to use our money. What then should we do ? 

We need to plan and execute our own retirement. It cannot be left to ‘best intentions’ of elderly gentlemen or your financial planners. It is too important a decision to be outsourced. 

Understand your family’s insurance needs and get yourself a basic term insurance policy. Nothing fancy, no bonus, no survival benefits. Survival itself should be enough benefit. 

Term insurance is a necessary cost for every earning member, best to treat it as such. 

Now, figure your retirement cash flow needs and start planning for that. This is, of course, a whole different topic, we shall go into more detail over multiple posts. 

But while you do the planning, do yourself a favour and immediately start investing via SIP in an Index fund and keep that going. 

So, is that it, is LIC not worthy of our money at all? 

Well, I wouldn’t say that. A large part of the country still buys LIC policies and will probably continue to do so. Therefore, when LIC goes public, that is one share I am going to invest in for the long term. So, yeah I would rather be an owner in that business than a customer.

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Key Takeaways:

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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.