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Do you know all the negative aspects before signing up for an investment option?
A closer look at the premium payment under Insurance policies reveals the hidden cost.
Limited premium pay offers shorter premium periods and longer policy coverage. But is it really a wise financial choice? In this article let us discover the true cost and explore better alternatives for your financial growth.
Let’s get started!
Table of Contents
1.)Limited Pay option
2.)Think one step ahead
3.)Let’s Do Some Number crunching
- Scenario 1:
- Scenario 2:
4.)SIP – A time-tested theory
5.)Charges and Lock-in Period
6.)Simple and Effective Life Cover
7.)Summing-up
1. Limited Pay option
All insurance products offer limited pay options i.e., limited period premium payment. Even though the policy is for 20/30 years, the policyholder has to pay the premium for only 10-15 years, and many people get lured into this thinking that this is a feasible option.
But the truth is, it is not cost-effective! The Premium Amount will be higher than the normal Regular Pay Premium. This will affect your cash flow. If we calculate the Internal rate of Return (IRR) for both options, it is marginally high for Regular Pay.
2. Think one step ahead
As financial planners, we insist to invest on other cost-effective investments which have better liquidity and offer higher returns. Instead of paying premiums for endowment plans, Money policies, and ULIPs, you can do SIP in Mutual funds.
Now, we will show how your investment grows exponentially under Systematic Investment Plans through real-life scenarios!
3. Let’s Do Some Number Crunching
What do insurance companies tell you about a Limited Pay Option? You can pay the premium for a little amount of time and enjoy watching the fund grow. But, what is the big deal about it? The same is possible in a Systematic investment plan and also it surpasses these insurance products in terms of returns and Liquidity.
Let us understand the concept of the power of compounding in SIP through two scenarios.
Scenario 1:
Imagine a person doing a Monthly SIP of ₹10,000 for 5 Years. Let us assume the fund yields 12% returns. After the initial investment period of 5 years, the fund is allowed to grow without any further SIPs. The final corpus value at the end of the investment period is ₹ 8.11 lakhs. The following table shows the final Maturity value after the deferment period. The longer the deferment period, the better the final maturity value.
| Investment Period (years) | SIP Amount | SIP Period (Months) | SIP Corpus | Deferment Period (years) | Final Maturity Value |
| 5 | 10,000 | 60 | 8,11,036 | 10 | 25,18,955 |
| 5 | 10,000 | 60 | 8,11,036 | 15 | 44,39,260 |
| 5 | 10,000 | 60 | 8,11,036 | 20 | 78,23,492 |
Scenario 2:
Imagine a person doing a Monthly SIP of ₹10,000 for 10 Years. Let us assume the fund yields 12% returns. After the initial investment period of 10 years, the fund is allowed to grow without any further SIPs. The final corpus value at the end of the investment period is ₹ 22.40 lakhs.
The following table shows the final Maturity value after the deferment period. The longer the deferment period, the better the final Maturity Value.
| Investment Period (years) | SIP Amount | SIP Period (Months) | SIP Corpus | Deferment Period (years) | Final Maturity Value |
| 10 | 10,000 | 120 | 22,40,359 | 5 | 39,48,278 |
| 10 | 10,000 | 120 | 22,40,359 | 10 | 69,58,215 |
| 10 | 10,000 | 120 | 22,40,359 | 15 | 1,22,62,752 |
Under both scenarios, the SIP is similar to the Limited Pay Insurance Premium amount. But under an insurance policy, the final Maturity Benefit is available to you at the end of the Policy Term.
How does the power of compounding work? The longer the tenure, the better the returns!
An interesting fact is that the return on investment is also lower than the Debt Instrument return in an insurance policy. The two important drawbacks under these insurance cum investment products are your funds (investment) get locked and it yields low returns.
4. SIP – A Time Tested Theory
SIP investments are ideal for meeting your long-term financial goals e.g. children’s higher education, children’s marriage, retirement planning. These are essential needs of every family and most of us are not in a position to invest as a lump sum, investing in SIP requires only a little extra effort and amount compared to putting a coin in a piggy bank.
Imagine how it would feel if one day after you wake up, the same piggy bank you put coins in every day turns into 1000 different piggy banks. That’s SIP for you!
Start your SIP Investment as early as possible because investing regularly for a long period of time may help you accumulate a sizeable corpus through the power of the compounding effect and also in addition to that, it inculcates a discipline in your financial savings.
What can be more effective than SIP in building Long-term wealth?
5. Charges and Lock-in Period
In addition to the premium you pay, the insurance company may track on additional fees such as premium allocation fees, administration fees, mortality fees, switching charges, redirection charges, etc.
The SIP, on the other hand, is not subject to an additional fee except the SEBI-prescribed expense ratio. NAV declared in mutual funds are post expenses. NAV declared in ULIPs are pre-expenses. Insurance policies also have hefty surrender charges.
SIPs are highly liquid. Anytime you choose, you can withdraw your investment. This is true unless you enroll in an ELSS-backed SIP, in which case you must follow a 3-year lock-in period. A ULIP, however, has a 5-year lock-in term, meaning you cannot cancel the policy before it matures.
6. Simple and Effective Life Cover
As a reader you might ask, if I invest in SIP instead of Limited Pay Insurance, then what about my Life Cover?
Term Insurance is the right option for your Life cover!
Financial advisers today assert that “Term Insurance” is the best and most suited type of policy available since it offers a high level of protection at a reasonable price.
A money-back policy or unit-linked insurance policy with the same coverage would cost more money than the premium you pay.
The term policy’s substantial coverage is due in part to the no-investment component associated with the policy and the premium required to cover the risk.
A combination of Term Insurance and SIP can do wonders for your investment portfolio!
7. Summing-up
This article is to show a broader image of marketing gimmicks happening in the insurance field and also to raise our concern for investors that their funds used for premium payments might be used more effectively elsewhere with potentially higher returns.
A limited-paying option is a marketing gimmick that makes you think that you are enjoying a long period of policy with less expenditure. Unlock your financial growth with better investment opportunities like SIP rather than investing in insurance cum savings plans.
To sum up, never make an investment decision based on your emotions. Emotional decisions have long-lasting consequences. You need to make any investment decisions based on sound financial principles and not just by surfing through social media sites like Quora, Facebook, Twitter, etc.
Your investments should generate returns to keep pace with inflation to reach the final goal. Avoid investment traps that can derail your financial plan.
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