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Is LIC the Best Insurer for You?- part 2

Hi friends, this is the 2nd part of the same post. You can check the 1st part of the post Is LIC the best insurer for you ? “. Below is the continuation of the conversation which takes place between Mr. Sharma and Mr. Nalanda

Mr.Sharma – But Why? Sir? This is LIC’s highest selling policy. This policy sells like hot cake. People not only buy this but invest it in this policy big time.

Mr. Nalanda – Mr. Sharma, have those people calculated the IRR while buying this policy. Do you know what is IRR?

Mr. Sharma – IRR? what is that Sir?

Mr. Nalanda – IRR means internal rate of return. This is the return rate at which my investments amount exactly equal to the returns given by them. While checking the returns and my premium, this policy only gives 6% IRR. Do you know what, if i approach a bank for Recurring deposit of same amount for 25 years, it will provide me a similar return. So why should i buy this policy?

Mr. Sharma- But they wont provide you with Insurance and Rs. 10 lakhs after your death. Is 6% return including Rs. 10 lakhs after your death?

Mr. Nalanda – No, excluding.

Mr. Sharma- That’s it!. If you calculate Rs. 10 lakhs additional then it should give you more IRR.

After doing some calculations, Mr. Nalanda speaks

Mr. Nalanda – Yes after including the additional Rs. 10 lakhs , IRR improves from 6% to 8.23%. But still this is not a great return to invest to?

Mr. Sharma – Then which policy or investment would give you such return. Even PPF gives you but that doesnt gives you the insurance amount?

Mr. Nalanda – I have done my homework Mr. Sharma. I will explain to you. I will buy a term insurance plan. Any term insurance plan for Rs. 1 crore would roughly cost around Rs. 12000 max yearly for my age. If I remove 12000 from my proposed investment amount of Rs. 45000 , I still have Rs 33000 to invest, right?

Mr. Sharma- Absolutely right. But term insurance would not give you any return. Its a pure insurance.

Mr. Nalanda – Right you are. But if something happens during the tenure of my term insurance, my family will straight away receive Rs. 1 crore whereas in your LIC policy, i will receive Rs. 26.71 lakhs after 25 years which is approx 1/4th of the Rs. 1 crore.

Mr. Sharma- But sir you will not get this amount in your hand. It is your family who will receive this benefit. So you wont enjoy the money you would be investing.

Mr. Nalanda – why not? I still have left Rs. 33000 from my Rs. 45000 which I can invest in any Mutual fund.

Mr. Sharma- Mutual Fund? Dont you see the markets are so volatile and mutual fund will not give you good returns. Infact there is every possibility that you might lose what you invest.

Mr. Nalanda – Agreed but have you heard about debt mutual funds. These are mutual funds whose 90% to 95% and above contribution is invested in government bonds and debt securities. Rest from 5-10% of contribution is invested in Securities and markets. Track any debt mutual fund for more than 5 years and it has indeed given more than 6%. Please see the below chart for your reference

List of Top 10 Performing Debt Funds in India with Returns

Fund Name Category AUM (Cr) 1-Year 3-Year 5-Year
SBI Magnum Medium Duration Fund Medium Duration Fund 1,671.35 12% 9% 10%
PGIM India Dynamic Bond Fund – Direct Growth Dynamic Bond Fund 41.37 14% 9% 11%
Franklin India Dynamic Accrual Fund Medium Duration Fund 3,910.34 10% 9% 10%
LIC MF Banking & PSU Debt – Direct Growth Banking and PSU Fund 861 12% 8% 8%
DSP Govt Sec Fund – Direct Growth Gilt Fund 592.94 17% 8% 10%
ICICI Prudential All Seasons Bond Fund Dynamic Bond Fund 2,707.37 11% 8% 10%
PGIM India Dynamic Bond Fund Regular Growth Dynamic Bond Fund 41.37 13% 8% 9%
Canara Robeco Short Duration Fund – Direct Growth Short Duration Fund 374.2 10% 8% 8%
Kotak Credit Risk Fund – Direct Growth Credit Risk Fund 4,735.49 10% 8% 9%
Aditya Birla Sun Life Floating Rate Fund – Direct Growth Floater Fund 5,986.40 9% 8% 9%

Returns – As on 29th October 2019

Source – Paisabazaar (https://www.paisabazaar.com/mutual-funds/best-debt-funds/)

Mr. Sharma just took a glance to the list above and after some few seconds he thought and replied

Mr. Sharma- Sir, agreed that mutual funds returns would give you good returns and again taking term insurance for Rs. 1 crore will provide you good return. But have you thought about taking term insurance about private company. Do you know whether they will pass your claim and pay your family Rs. 1 crore. LIC is been know to have a claim settlement ratio of more than 98% (2018-19) where they settle the policy amount 98 times out of 100. These private insurers would not be reliable and not to forget that LIC has a government backing which these private insurers lack. Please refer the table below

Insurance ProviderDeath claims receivedClaim settlement ratioDeath Claims PaidClaims Pending
LIC7,55,901 98.31%7,42,2430.50%
Max Life9,22397.81%8,8040.10%
Birla Sunlife8,43694.69%8,0551.70%
Tata AIA Life3,87396.01%3,6591.00%
Star Union Daichi1,26684.05%1,1910.30%
ICICI Prulife12,30996.68%11,5460.80%
PNB MetLife2,46687.14%2,2901.50%
Bajaj Allianz20,66191.67%18,9783.00%
Kotak Mahindra Life2,68691.24%2,4373.20%
HDFC Life12,18997.62%11,0312.30%
SBI Life14,87696.69%13,3033.20%
Sahara Life77890.21%7003.60%
Aegon Life46097.11%4130.20%
Canara HSBC57694.95%5163.10%
Exide Life3,43296.40%2,9551.60%
Reliance Life18,14294.53%15,2115.80%
Future Generali2,16089.53%1,8081.80%
Aviva Life1,69090.60%1,3960.50%
Bharti AXA Life1,11292.37%9002.90%
IDBI Federal Life1,01790.33%7364.30%
India First Life1,65582.65%1,1955.00%
Shriram Life1,96063.53%1,30711.20%
DHFL Pramerica95390.87%5456.50%
Edelweiss Tokio11993.29%685.00%

Source: Policybazaar – CSR for the year 2018-19

Mr Nalanda – Agreed that LIC is the top insurer whose claim settlement ratio is so high but what is the average claim settlement amount done by LIC? Do you know that?

Mr. Sharma- What is now average claim settlement amount?

Now Let’s see what Mr. Nalanda is asking in the final part of this post. Click here to see the final part

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