Summary of discussion with a prospect if LIC is a good product to invest for long-term
Prospect (Varun): Hello Mr. Advisor, Can you please tell me best LIC policy to Invest
Me (Advisor): Well, why do you consider payment LIC policy premiums as investing?
Varun: because I’m paying a premium and receiving money at the end of tenure
Me: sure, so how do you differentiate between saving and investing?
Varun: well, no idea….I think both are same
Me: To keep it simple, Saving is protecting money and Investing is to create new money after adjusting to inflation
Varun: So buying LIC policy is saving or investing?
Me: Its losing money
Varun: How?
Me: If returns from a product are equal to inflation, then it is called SAVING
If returns from a product are more than inflation, then it is called Investing
If returns from a product are less than inflation, then you are LOSING money.
In LIC products, you will get returns in the range of 3 – 5% per annum and long-term inflation is about 7-8%.
Varun: oh, but my agent said I will receive 28lacs after 25years by paying Rs 60,000 per annum premium.
Me: Can you covert maturity benefit into per annum percent?
Varun: No idea to convert into per annum percent.
Me: Its 4.5% and you are losing the purchasing power by 2-3% per year by considering LIC policies as your investment production.
When you are investing for the long-term, always ensure that per annum returns from the product are higher than inflation to maintain or increase your purchasing power.
Never mix Insurance and Investment and don’t make the mistake by investing in LIC policies and thinking that it will take care of you in the future as the returns are less than inflation
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