How Traditional Insurance plans Exploit your Money

Traditional Insurance Plans are deadly products to invest in.

Surprised?

You never understand where the amount is invested as it is not a transparent product.

Let me show you the way how to calculate returns from any traditional insurance policy. Next time when any insurance agent shows you a policy benefit illustration or your friend or relative asks you, “Is this a good policy to invest in?”, use this method to show the annualized return they can expect (before bonuses which will not make a significant impact).

Case: Guaranteed, but Lumpsum Payout

Here is a typical “guaranteed plan” offered by many insurers. This promises to pay a “fixed returns” for Y no of years after the premium is paid for X no of years. This sounds so great on paper. Let us investigate more with an example.

Here is a plan of LIC, Jeevan Lakshya for a 25Y policy with 22Y premium paying term. The sum assured ~ Rs. 10.10 Lakh and the annual premium is Rs. 43247 or Rs. 45193 with GST (notice that illustrations will not include taxes).

At the end of 25Y, the policy will pay out Rs. 1010000/- as a guaranteed benefit. It will pay Rs.49/- per 1000 Sum Assured as Simple Reversionary Bonus, which will be 12,37,250/-. The mentioned rate is of 2015-16. (Information available on LIC official website). The rate changes every year. Point to Note:- Simple Reversionary Bonus & Final Additional Bonus Rates are not fixed & largely depends on profitability of company. Hence, I term it as NON-GUARANTEED.

We need to tabulate all the cash inflow & outflow mentioned below

insurance plan cashflow
  • Col A is just the year no starting with zero (the 1st premium)
  • ​Col B a set of premium paying dates Col A is just the year no starting with zero (the 1st premium)
  • ​Col C the premium paid (before GST)
  • ​Col D the sum of total premiums paid each year
  • ​Col E actual premium paid (including GST). Shown as negative for return calculation. ​The money we pay is shown as negative and the money we receive is positive.
  • ​Col F Sum Assured on Maturity plus assumed Simple Reversionary Bonus paid is given to us (so this is positive).
  • ​Col G is the total cash flow that is the sum of Col E and Col F.  The final payout of Rs. 2247000 is shown as the final entry (25th Year).

​The XIRR or annualized return formula is as shown below.

​The XIRR formula is = XIRR(set of cash flow values, dates)

Returns Chart

​The annualized return is meagre “5.23%”

​This example shows that it is better to use dates + payouts and use XIRR at all times.

​When the payments are not immediate, you lose immensely and insurance company gain immensely. ​And we are not even considering the fact that the insurer can invest the premiums collected and earn a return on it over the many years they hold on to it.

​When the payments are not immediate, you lose immensely and insurance company gain immensely.

​Where do you think the bonuses come from?!!

​If you receive the payout immediately, not only is the return high, you can use it any way you want. If insurance company delay payouts, they can use it any way they want. ​Time is money!!

​This idea is also known as “Opportunity Cost!”

​If the money is locked-in, we lose more than we know!