Investment in LIC being a long, safe tradition for many, over several decades, and is being challenged by the new financial instruments in the recent times. The question of LIC over MFs is a question among many traditional LIC Investors. It is very important to understand, both are meant to cover different segments.
The answer to the question is no. Investments in LIC are not worth it. Let us look at why. There are two components of investing, one is to make your wealth grow. The other is to manage your risks, something that is done through insurance.
The risk of loss of life is one of the biggest risks. If the earning member of the family passes away due to an unfortunate circumstance, the family needs to be covered for a loss of income. That is where life insurance come in.
When we say LIC investments we refer to money back or endowment policies from LIC. These policies have both an insurance and investment component. They pay a specific amount on death of the policy holder and also on maturity which may be after the policy term of 10, 15 , 20 years or till a certain age limit.
LIC policies are sold aggressively by your neighboured LIC agents because selling such policies come with a high commission. There are several selling points - 1) protection, 2) return on investment and 3) tax benefits. Earlier, when investment options were few, these had become very popular. But investment in LIC is not a wise thing to do anymore.
If you buy a LIC policy, you are buying both insurance and an investment plan. Financial planners strongly recommend that you should never mix insurance with investment. Insurance is purely a risk management exercise.
Insurance is best taken care of by buying a term insurance which is a pure risk cover. Thumb rules suggest that you require an insurance cover which is at least 10 times your annual income and term insurance is the only way to get such a cover. For as little as Rs 15,000 or even lesser you can get a Rs 1 crore term insurance cover. An endowment plan which provides a 1 crore cover would be too expensive to afford.
What about the Investment? The argument for endowment plans is that they pay out an amount on maturity, but term plans pay nothing. You can also surrender it if you need cash and get a loan against it.
However, the internal rate of return for most endowment plans, or traditional life insurance plans is only in the range of 4-5 per cent That is a return that does not even beat the rate of inflation. Hence LIC policies are a bad investment.
Instead, the money you save by buying a term policy which gives you a much higher cover, can be invested through a monthly SIP in the diversified equity fund. Mutual fund returns are subject to marker risks but over a longer period they have a potential to give you much higher returns in the range of 10-12 per cent.
Hence buying a term policy and investing the rest in an equity mutual fund is a much smarter financial choice than investing in LIC policies alone.
Both ELSS, and Life Insurance Cover are part of Tax Saving Options for an investment up to Rs. 1,50,000 per year. Refer Best Income Tax Saving Investment Options in India