In fact, I am sure you have bought such a policy.
And, I am sure you don't know you lost Rs.4.80 lakhs by buying that policy.
Want to know how? Here's the answer... straight and simple.
Say you are a 30-year old person and have bought a 20-year Moneyback policy for a Sum Assured of Rs.10 lakhs. Your premium out go would be around Rs.70,000 per annum.
As with any typical Moneyback policy, let us suppose that your policy gives you 15% of the Basic Sum Assured at the end of 4th, 8th, 12th and 16th year. Further, on maturity you get back the balance 40% of the Basic Sum Assured + Bonuses Accrued.
Thus, you will receive
- Rs.1.50 lakhs after 4th year, 8th year, 12th year and 16th year.
- And after 20 years, on maturity you will get Rs.13.50 lakhs (which includes Rs.4 lakhs as 40% of sum assured + bonus of maximum around Rs.9.50 lakhs, assuming 8% p.a. policy returns.)
(Imp: Though the policy returns may be 8% p.a., your effective returns would be 4-5% p.a. only; after deductions towards agent's commissions, policy admn. charges, fund management fees, etc.).
Instead, suppose you go for the good old and truly trusted Bank FD. And to make a like to like comparison you
a) Buy a Term Policy of Rs.10 lakhs for 20 years. This would cost you about Rs.3000, leaving you with Rs.67,000 to invest in the FD.
b) Take out Rs.1.50 lakhs at the end of 4th, 8th, 12th and 16th year.
Then, under this approach, you will receive
- Rs.1.50 lakhs after 4th year, 8th year, 12th year and 16th year.
- And after 20 years you will receive Rs.20.40 lakhs / Rs.18.30 lakhs / Rs.16.48 lakhs / Rs.14.85 lakhs based on your tax bracket of Nil / 10% / 20% / 30% respectively (assuming 8% bank interest).
(Imp: Since there are no deductions of any kind in FDs, entire 8% p.a. yield comes to you.)
Clearly, you lose Rs.6.90 lakhs / Rs.4.80 lakhs / Rs.2.98 lakhs / Rs.1.35 lakhs depending your tax slab rate.
(By the way: As you move up the tax bracket, you can buy more tax efficient products than bank FDs and improve your returns. But for simplicity sake I am ignoring the same here.)
ACTION PLAN
Act 1: Call your agent and ask him how to salvage the situation. You will still lose money, but it is better to cut losses at the earliest.
Act 2: Don't just share jokes and anecdotes on Facebook, Whatsapp, LinkedIn etc. Share this article too with everyone and help them save lakhs of rupees.
Act 3: Eat one pizza less this month and buy my encyclopedic ready financial reckoner 'Your Guide to Finance and Investments' (which Amazon India is currently offering at 25% discount at Rs.300 only). It is an exhaustive and thorough analysis of 51 of the most common investments with a clear and unambiguous recommendation... to buy or not to buy... for each product.
Spend Rs.300. Save Rs.4.80 lakhs. Have you ever made such stupendous returns?
