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Foundations

FDs or government bonds better than "Insurance" plans

A twitter discussion led Ganesh Babu into writing about how insurers take you for a ride. An ad at www.simpleinsurance.in from ICICI shows you how, if you invest Rs. 2,000 per month for 20 years, you could get a pension of Rs. 15,315 per month after 30 years (at 10% annualized return).

But let’s have a closer look. Let us put the Rs.2,000 per month in a bank fixed deposit (FD) at a nominal 8% interest compounded annually. That makes Rs.24,000 annual investment in FD. For the next 30 years, let us assume that the interest rate remains constant at 8%. The Rs.24,000 per annum investment at 8% will accumulate to Rs.29.36 lakhs.

This amount (Rs.29.36 lakhs) if reinvested again in FD at 8% interest will give annual interest of Rs.2.35 lakhs or a monthly interest of Rs.19,575 for life. Now compare with this the Rs.15,315 per month ICICI’s Retirement Plan. The FD comprehensively beats the returns of ICICI by a massive Rs.4,260 per month (21.8% more). And don’t forget that the FD return is more or less guaranteed where as ICICI’s 10% return in risky and market dependent (it could be less, or more). Also, the accumulated Rs.29.36 lakhs is preserved for passing on to the next generation

If you went with ICICI – you would pay 2,000 a month, maybe get your 10% return, and in return get a pension of Rs. 15,315 per month. After you die, they give the money to your spouse. And from first takes it seems after your spouse dies, the corpus is involuntarily donated to ICICI. (Want the money back? Er, we’ll pay you around 1.5K less per month, ok?)

If you consider the same 10% return, then the amount you make, annually compounded after 30 years, is Rs. 39.47 lakhs. (Ganesh has wisely taken a more sane fixed return of 8%, but I’m illustrating how much you’re being robbed). That, invested in an FD or govt. bond at 8% yield, gives you an income of Rs. 26,319 a month. Glee. 40% more than the “insurance” option. Not just that, your family gets to see the entire money should you die.

And there’s the flexibility – need some extra money for hospitalization, to start a business or anything of that sort? With ICICI’s annuity, you have no options to withdraw a big lumpsum. In option 2 – where you manage your own money – you can do what you want.

ICICI’s retirement plan – and to be fair, every single insurer’s retirement plan – is a waste of time. Simply buy long term FDs, long term government bonds or growth gilt funds; the return is far superior. If you want tax savings, get into a term plan and buy an ELSS mutual fund; anyway they will not last much longer (the tax saving nature of them).

Ganesh’s post is eye opening and I will do a post on the crappy annuity plans we have, on another day. That alone is enough to never ever recommend the New Pension Scheme to anyone I know; because it’s your money they don’t allow you to touch.

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