Monday, 30 May 2016

How LIC defrauds policy holders!

All of us have that one Uncle/Aunty ji who will boast about having a smart LIC policy and scheme which will help us double/triple our money. Often they would be speaking in an erudite way, making us believe we are fools. Gone are the days LIC policies were used as Insurance for coverage from unfortunate events, today agents talk about it as an investment avenue. Alas, many of us fall for their marketing gimmick. Honestly, I was fooled too, by an Uncle ji! 

Today my friend buzzed to discuss an 'extra-beneficial' policy her Aunty ji was pestering to invest in. So I took up the details of policy and realised that we were indeed losing money by investing in those policies. Here's how:

The policy was for the tenure of 25 years. Considering annual payment of premium, my friend would have to pay Rs 59522 p.a for 20 years. The payback of the scheme was Rs 1,50,000 at 5th, 10th, 15th and 20th year plus Rs 17,25,000 at a 25th year. 

In pure absolute calculation that would be :
Invest Rs 11,90,440 and Earn Rs 23,25,000! Wow! my profit is Rs 11,34,560!! Policy is making me rich??

No. Never.

The problem with the above view is, we are forgetting about the Inflation rate. To make a real profit in our economy, we have to earn an interest rate which is little higher than the inflation rate. Only then we earn the profit. (Ask any economist, he will surely agree).

Now on an average (for past 5 years) our inflation rate as stated by http://www.inflation.eu is 7.79%. For ease of calculation, I consider it 8% (many of us even feel that Govt might have suppressed the rate. My parents always scream about the rising prices!! )

[Let me tell you concept of discounted cash flow - DCF. (it is simply, today's Rs 100 value would be Rs 92 next year.) DCF analysis uses a particular rate, in our case inflation rate,  to arrive at present value of estimate to evaluate the potential of investment]
I took DCF of 8%  to calculate the present value (today's value of premium which my friend would pay for next 20 years)  which amounts to Rs 5,84,395

Present value of the returns I would receive is Rs 5,02,915  (on 5th, 10th, 15,20th and 25th year)


The excel sheet shows the calculation. 

Indeed LIC and all such companies make us a fool through their marketing gimmicks.

I know now you will ask where to invest.

I suggest, if you are opting for long-term returns, please choose Stocks or Mutual funds (first learn the basics and then invest- it is very easy) or the Debt market, or plain vanilla-Bank FD! Just remember to check the rate of interest offered. Anything they offer should be greater than the average Inflation rate. 
And never trust a suggestion of a person who makes a commission out of your decision. As they as "Investment is a subject matter of solicitation"

I hope you found this article helpful.

P.S: No offence on LIC. I have used it as the illustration for my friends. No intentions of defaming :D  


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