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Friday, April 1, 2016

Buying a term plan and investing in mutual funds is better than buying non-term life insurance

 

 

Continuing with our previous case study, you need a life cover or sum assured of 2 crores for your life insurance needs, but instead of a non-term traditional life insurance plan, you choose a term insurance plan. Based on premium rates of the same life insurer discussed in our earlier example, your annual premium for 20 year term insurance policy for a sum assured of 2 crores will be around 31,000. As discussed in our case study, your monthly savings is 36,000 or in annual terms, your saving 4.32 lacs. You can easily afford the premium of the term policy. By opting for a term plan, you can ensure that you have enough cover to provide protection to your family in the event of an unfortunate death. Even after paying the premium of your term policy, you have around 4 lacs savings left for investment. Let us first focus on your 80C tax savings. Your 31,000 term insurance premium is eligible for 80C benefit. Let us assume, to meet your balance 80C requirement you invest in 1.2 lacs per annum in an ELSS fund. That still leaves you with another 2.8 lacs of savings per annum that you can invest in a diversified equity fund. Over the last 20 years period, top performing ELSS funds gave in excess of 20% compounded annual returns. However, let us be conservative and assume that you get 15% annualized returns from your ELSS investment. With an annual investment of 1.2 lacs in an ELSS fund yielding 15% returns, you can accumulate a corpus of over 1.2 crores. What about the returns from the balance 2.8 lacs of savings that you can invest in a diversified equity fund? The average Systematic Investment Plan (SIP) returns in diversified equity funds over the last 20 years has been 17%. Assuming average historical rates of return, if you invested the balance 2.8 lacs in diversified equity funds through monthly SIPs, you can accumulate a corpus of over 4.6 crores. While your term plan will have no maturity benefits, your investments in ELSS and diversified equity funds will generate a corpus of 5.8 crores over 20 years. Compare this with the policy maturity amount of 1.1 crores from an endowment plan, as discussed earlier. There is simply no comparison. Let us now see, what annuity income your corpus of 5.8 crores can yield, on a post tax basis. Assuming a pre-tax annuity yield of 8%, as discussed earlier, you can get an annual income of nearly 32.5 lacs on a post tax basis. On a monthly basis you will earn over 2.7 lacs. You will recall that, based on 4% long term inflation rate, by the time you retire, your monthly expenses will be 2.6 – 2.8 lacs. Your annuity income will be sufficient to meet your monthly expense needs. Therefore, a combination of a term insurance policy and mutual funds will help you address both your life insurance and investment needs. You should note that these two needs, life insurance and investments, are different in nature. Therefore the financial instruments addressing these two needs should also be different.

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Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds

Top 10 Tax Saving Mutual Funds to invest in India for 2016

Best 10 ELSS Mutual Funds in india for 2016

1. BNP Paribas Long Term Equity Fund

2. Axis Tax Saver Fund

3. Franklin India TaxShield

4. ICICI Prudential Long Term Equity Fund

5. IDFC Tax Advantage (ELSS) Fund

6. Birla Sun Life Tax Relief 96

7. DSP BlackRock Tax Saver Fund

8. Reliance Tax Saver (ELSS) Fund

9. Religare Tax Plan

10. Birla Sun Life Tax Plan

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