Many agents are faced with a serious issue while selling life insurance. The younger customers tend to think that it is better to buy term insurance instead of traditional endowment insurance. The popular feeling is that traditional endowment insurance is low return and therefore not worth it. Instead with the same money if one buys mutual funds, one earns much more. This perception is widespread and many agents also believe in this argument. The truth is quite the opposite.

Facts on Mutual Funds

Mutual funds offer you a chance to earn more. There is no guarantee that you will earn more. All mutual funds do not give high returns. I have been writing about this regularly on this Blog. Live Mint reported on 4 Sept 2019 that the 5-year returns (2014-2019) on large cap mutual funds was 7.79 %, while midcap mutual funds earned 8.57 %. During the same period the average rate of interest on Public Provident Fund (PPF) was 8.21 %. (Read the full article 5-Year Return on Mutual Funds). PPF is a safe investment, while mutual funds are not. For the risk one is taking in mutual funds, one expects a much better rate of return. Do you agree that mutual funds do not give high returns?

I have done a bit of research on this subject since 2016. Roughly 50 % of the mutual funds earn a risk-adjusted return less than 8 %. Implication: You buy a mutual fund. You only have a 50 % chance of earning at least 8 % on your investment. Investment risk is always hidden till it surfaces. At the time of purchase you do not know whether you will get 4 % or 8 % or 18 %. This is your luck! This is the reason why more than 90 % of the savings of households is in low risk. (Read The Layman is a Prudent Financial Planner). People want to save money for a better future. They do not want to risk their future on the basis of unsubstantiated facts (Read This is Fact not an Opinion).

Mutual funds cannot be compared to traditional low risk endowment

Mutual fund is therefore not an alternative to traditional endowment. In traditional endowment the risk is very low. Customers are reasonably certain they will get their money. In mutual fund no such certainty exists. The two types of investments, in financial terms, are not comparable. You should compare oranges with oranges and apples with apples. You cannot compare oranges with apples. Life insurance endowment cannot be compared to mutual funds. It is scientifically wrong. At least those in life insurance should not fall for such misleading and mischievous projections.

Now the question of whether to buy term insurance

For those customers who wish to buy term insurance we should sell term insurance only. However in most cases the choice of term insurance is made by customers on false data promoted by the so called financial experts. I present two points that need to be brought to the notice of customers.

Term insurance can be bought as a part of ULIP or as a stand alone product. We first deal with term insurance as a part of ULIP.

Unit Linked Insurance Plans (ULIPs) and Term Insurance

In case term insurance is part of a Unit linked Insurance Plan (ULIP), the premium paid has two components – mortality charge and investment charge, apart from the administrative charges. The mortality charge in a ULIP product increases with age. While the total premium is constant, the proportion of mortality charge keeps increasing with age. The cost of insurance in ULIP over a 20 year period may be almost the same, or more, as compared to traditional endowment. This naturally determines how much you can save and earn on an ULIP product, as a policyholder. The money paid for insurance (mortality charge) is not returned. This is one important reason to not prefer ULIPs, from the customer’s point of view. The insurance is costly and the savings is uncertain, since ULIPs are high risk products.

Traditional Endowment and Term Insurance

Bryce Sanders writing in MDRT Blog makes a very interesting observation. (Read the full article here https://www.imdrt.org/blog/whole-life-vs-term-insurance/?utm_source=rss&utm_medium=rss&utm_campaign=whole-life-vs-term-insurance). Bryce Sanders compares the choice between buying a house or renting with that of buying an endowment or term insurance.

Should you buy a house or rent it?

Bryce Sanders makes the point that when you can buy a house, why should you rent it? The argument goes somewhat along these lines. Suppose I rent a house today. Suppose that the market value of the house is about Rs. 1 crore. At 3 % to 4 %, the monthly rent will be Rs. 30,000 per month, approximately. Suppose I live in rented houses all my life. Twenty years later the market value of a house is likely to be Rs. 10 crore. The rent will be Rs. 300,000 per month.

Cheaper to Own a House

Instead if I had purchased the house, my EMI might have been higher, but 20 years later the house would be mine. For 20 years my EMI would have been constant, approximately Rs. 50,000 per month. EMI does not change as I grow older. At the end of 20 years, I can also get the benefit of the capital appreciation on the property I own. It therefore works out cheaper to own an house rather than rent a house.

Cheaper to own an Endowment Policy

The same with buying term insurance. You pay the premium regularly but do not get financial returns back. The policy holder’s family is protected. But if you buy endowment, the family is protected plus you manage to build your savings. At the end of 20 years, you receive much more than the premiums you have paid. For 20 years your premium is the same every year. If you buy at an early age, the premiums are also low, giving you a greater financial advantage. And the maturity amount is tax free. Buying an endowment makes a better financial sense than buying term insurance. And it is much safer than mutual funds.

Develop Your Strategy to Explain this

Explain the financial advantage to your finance-savvy customers. Show them that the yields they are expecting on mutual funds is only an expectation. Past data shows that only 50 % of mutual funds earn more than 8 % return, risk adjusted. In term insurance, financial yields are non-existent. Endowment gets the return which is commensurate with the risk. Low risk investments result in much better profit optimization in the customer’s investment portfolio.