Mutual Fund + Term Insurance: Best of both Worlds

Investments comes for our help when we are there for long time and insurance rescues our family from financial crisis when the earning member is no more. Investment and Insurance both have their own importance but most of the time we get confused or confused by others and club both of them by this popular product called endowment plan - without realizing that these endowment plans give a return of 3% to 7% only. The best strategy that the layman investors could adopt is to take protection plan or what we most commonly call the Term Insurance cover and top this up with a Systematic Investment Plan (SIP) in an equity Mutual Fund Scheme.

A term insurance plan is an insurance cover taken by on the life of the person insured. In case of unfortunate death or disability or critical illness of the person insured, the beneficiary i.e. nominee shall receive the sum assured under the policy; however in case of survival the policyholder shall receive no return.

(A) Features of a Term insurance policy

1. This plan covers risk only: No return if nothing happens

2. Cheapest form of life insurance: The premium is as less as 10% as compared to traditional plans

3. Most suited for sole bread earners of the family: With less premium we get maximum coverage

4. Tax Benefits: It has same tax benefits under Section 80C of Income tax (max. limit 1.5 lakhs)

(B) Systematic Investment Plan of Mutual Funds

SIP or Systematic Investment Plan is a disciplined and a systematic way of investment in mutual fund schemes. Usually in India systematic investment in mutual funds is referred to as SIP. The investment can be made in any scheme i.e. equity, debt, gold or a blend of these. In SIP the money is directly debited from the investor’s bank account on a predefined day of each quarter/ month or week. The mutual fund scheme could be debt or equity oriented fund and can have tax saving equity linked saving schemes (ELSS). The below matrix suggest the various types of equity and debt oriented mutual funds, the risk return Matrix and their debt equity profiling.

For Example Let’s take LIC’s Most popular Plan New Jeevan Ananad:

For a thirty year old person the premium for 1 crore cover for 35 years tenure comes to Rs. 2,99, 434 annually or monthly premium of Rs. 25,516. For the same person if he takes LIc’s Amulya jeeva Policy (a Tem Insurance Prodcut) the Premium Comes to Rs. 32,096 annually or Rs. 2,675.

Suppose Mr. A takes Jeevan Anand and Mr. B takes Amulya Jeevan and invests remaining amount in Equity Mutual Funds. Let’s see the outcome:

Particular*	Mr. A takes : LIC's Jeevan Anand	Mr. B takes: Term Insurance + MF SIP
		LIC's Jeevan Amulya	Equity MF SIP
Monthly Premium	24,417.00	2,312.00
Service Tax	1,099.00	416.17
Total Monthly Premium	25,516.00	2,728.17	22,105.00
Timer Period	35 Years	35 years	35 Years
Death Benefit	1 Crore	1 Crore	NIL
Survival Benefit	Simple Annual Bonus + Final Bonus	NIL	Market Based Return
Assumed Bonus/ Return Rate (Annual)	6%		15%
Maturity Amount	2,45,27,244.00	NIL	15,30,39,096.00
*For A 30 Year old person and 35 years tenure

As we can see from the table above the maturity amount for Mr A comes to around Rs. 2.45 crores whereas Mr B who has taken combination of term insurance and mutual funds the total amount could be as much as Rs. 15.30 crores which is more than six times compared to Mr A who has taken Endowment Policy only. The difference in total return is really huge and makes a significant difference in the person’s wealth.

However, we should note that endowment plans are assured benefit products, in other words on maturity the insured will get the sum assured, plus the bonuses declared by the life insurance company every year. On the other hand, in the case of term plan + MF ELSS, maturity benefits are not assured, because there are no survival benefits in term plan and mutual funds are subject to market risks.

Further the 15% returns assumption for ELSS, is a critical element in financial case for term plan + ELSS versus an endowment plan. In the last 15 – 20 years, monthly SIP in top performing ELSS would have yielded more than 20% annualized returns, so this type of return can be expected in future.