Is LIC Policy a Good Investment?

LIC in Brief

The Life Insurance Corporation of India has been in the insurance space since 1956. It has a customer base of over 250 million. The company currently occupies over 60% of the market share in the insurance sector. 

LIC’s distribution network comprises over 1.5 lakh insurance agents, partnerships, and online sales channels. Its product offerings include endowment-based policies, ULIPs, term insurance plans, money-back schemes, and pension plans. 

Should You Purchase LIC Policies?

LIC policies have for long been the safest insurance scheme, given the backing of the Government of India. The company has also consistently reported a high claim settlement ratio over the years. 

The claim settlement ratio defines the total number of claims settled by LIC of the number of claims raised by beneficiaries. In FY 2020-21, it reported a CSR of 98.62%. This number indicates the reliability of the insurer in settling death and other claims. With LIC, you can rest assured that your family will receive the benefits that they are entitled to on your death. 

Is LIC Policy a Promising Investment Avenue?

If you are planning to maximize savings and get high returns on your investments, LIC policies may not serve your requirements. This is because the internal rate of return offered on traditional endowment policies is only around 4% to 5%, which may not cover inflation.

To counter this, LIC has also introduced ULIPs that offer the benefits of both insurance and investment. However, you can gain better returns through traditional investment avenues such as stocks, bonds, and mutual funds. You should only consider them if you have a high to medium risk appetite.

However, you can invest in insurance for direct policy benefits or debt funds for low-market risks but decent returns.

Life insurance in any form ensures that your dependents and their future financial needs are taken care of in the event of your unfortunate demise. You can add LIC policies into your financial portfolio as effective risk management.

Benefits of purchasing LIC Policy

LIC policies offer multiple benefits as mentioned below:

• Government-owned - LIC comes with the sovereign guarantee of the Indian government, which makes its offerings a safe and reliable investment. 

• Tax Benefits - Policyholders can enjoy tax deductions on the premium amount under Section 80C of the Income Tax Act, 1961. All the benefit proceeds are also subject to tax exemptions under Sections 10(10D). However, these tax benefits apply to insurance plans bought from any insurance provider and to savings schemes such as PPF and FD. 

• Additional Returns - LIC pools the premiums collected from policyholders, invests a majority in government securities and earns profits. A percentage of the extra earnings is offered to its customers in the form of bonuses. 

• Financial Security - The sole reason why people should invest in life insurance schemes from LIC is to financially protect their dependents and secure their future if any misfortune were to befall the policyholder. 

Where Do LIC Policies Fall Short?

The rate of return is significantly lower than most market-linked investment instruments. The amount that one receives on maturity is lower than what is possible under PPFs and FDs. This makes the latter options a better savings avenue. The low rate of return from LIC does not ensure protection against inflation. 

The Final Word!  

Insurance and investment should not be mixed. Both should be given equal importance during financial planning. While LIC policies offer enough benefits to secure your family’s finances after your death, they do not generate enough returns for wealth creation. Therefore, you should look to invest in different financial instruments serving individual purposes.