I have been receiving lot many queries where investors wants to know the best lic policy with high returns. Of course, LIC policies are normally the first investment instruments which investors have heard off, either from parents, friends or relatives.
Without knowing how LIC policies work and how they are going to benefit in long term investing and achieving goals, one starts believing that LIC policies are the safest bet to have in the investment portfolio. But over a period of time when one realizes that there are other instruments in the market which are generating better returns, that makes the investor search out for best LIC policy with high returns, as one finds difficult to compromise with the “Safest” Image of LIC, but also expects to get the returns comparable to other available products like Equity Mutual funds.
This article is about to make you understand how lic policies works and also help you find best LIC Policy for high returns.
Best LIC Policy for High Returns – Understand how LIC Policies works
LIC Policies like any other life Insurance policy of other company, has 3 versions in its products – Endowment or Traditional Policies; Unit Linked Insurance Plans (ULIPs) and Term Insurance Plans.
Endowment Policies or popularly called as Traditional insurance Policies comes in Participating or Non-Participating variants. In Participating Endowment Plans, policy participates in the profits generated by corporation, and policyholder gets annual bonus (Depending on the corporation’s overall profitability), along with Final Bonus (If any, as per policy terms and conditions).
So what investors in endowment policies get at the maturity is Maturity Sum Assured + Annual (Interim) Bonus+ Final bonus (If any).
In case of Non-Participating policies, Investors gets only Maturity Sum assured.
Unit Linked Insurance Policies (ULIPs) are quite transparent products unlike Traditional Plans. In ULIPs investor is given with a choice to choose among investment asset class where he wants to be invested. Depending on the other terms and conditions, in ULIPs policyholder can have his own choice of asset allocation in equity and debt. The Returns of the product depends on how well the asset classes have performed and how well the fund was managed.
In both Endowment and ULIPs, another major factor which impacts the returns on Investment that is Charges of the product. There are many different costs associated with Insurance policies like Allocation charges, Administrative charges, Mortality charges, Fund management charges, service tax on premium and charges etc. All this in total impacts the Policyholder returns quite badly.
In the case of ULIPs all these costs are quite transparent and one can easily make out from the policy illustration before buying the policy as to how much charges are going to be paid from the policy premiums and thus what returns one should expect, whereas charges are quite opaque in the case of endowment policies.
LIC has most of the policies in the Endowment category.
The third variant in the Insurance policies is Term Insurance Plans. These are the simple plans which offer no Investment. This is a pure insurance cover, so whatever premium policyholder pays is a pure expense. However this expense can further be curtailed by buying the policy online as with no agent in between.
How to find best lic policy for high returns?
Now when you know that which version of the policy (I.e. Endowment, or ULIP) suits you the best, so first thing first you need to search for the products available in that category. If you are buying policy through agent then ask him to provide you all these details.
As I wrote above that endowment policies are opaque policies where you do not even know where your money will be invested and neither will you get to know the charges of the policy, and LIC have maximum policies of this sort only, in its product kitty.
So here to find out the past performance of lic policies, you need to learn more on the bonuses paid on the specific policies in the last few years. You may assume these rates to continue going forward, but this does not mean that your Return on Investment is equal to the bonus rates.
Investment returns are the difference between what you pay and what you get. What you will get can be gauged from past bonus rates and sum assured of the policy, but what you pay depends on your age and sum assured opted for. Higher the age and sum assured higher will be the mortality charges and thus lowers the returns.
Ask your agent to prepare an authentic illustration from LIC portal only based on what you will pay and what you assumingly will get, and tell him to calculate the IRR of the product. This IRR would be the rate of interest that you might get during the policy term, which can be compared with other suitable investment Instruments to decide further.
Best LIC policy for High Returns – Conclusion
The term “High Return” is quite vague. You need to be sure of what exactly you call as high return. In number terms you need to be clear as to what you are expecting from a product.
In the article above I have explained how to find out the returns in LIC policies especially endowment policies. Now after doing all this calculation if you find the returns of the insurance product of your choice can give you the “High returns” as expected, then go for it, else drop it.
In my personal experience LIC policies generates in the range of 1%-5% per annum of return. If this range is something you are seeking for in your LIC policies, then you will surely find some suitable product.