Why Insurance Isn’t Investment: An Analysis of LIC’s Traditional Policies vs. Equities

Insurance and investment are two essential pillars of financial planning, but they serve fundamentally different purposes. Insurance provides financial security against unforeseen risks, while investment focuses on wealth creation and growing one’s financial portfolio. For decades, these two objectives were blurred, especially in India, thanks to Life Insurance Corporation’s (LIC) innovative yet misleading approach of bundling insurance with investment.

LIC’s strategy to offer policies that promised both insurance and returns resonated with Indian sentiment—security and savings under one roof. While this worked for a long time, the tide has shifted. More informed investors now prefer separating these two goals for better financial outcomes. Let’s explore this shift using LIC’s traditional insurance policies as an example and compare them with equity investments.

LIC’s Traditional Policy vs. Equities

Scenario Overview:

• Policy: Traditional Endowment Policy from LIC.
• Investment Amount: ₹10 lakhs annually for 20 years.
• Total Investment: ₹2 crore.
• Comparison: LIC’s maturity benefits versus returns from equities.

Returns Comparison:

LIC’s Traditional Policy Returns

LIC’s traditional endowment policies typically offer a mix of:

1. Sum Assured: The guaranteed amount payable on maturity or in case of the policyholder’s death.
2. Bonuses: These include reversionary bonuses (declared yearly) and terminal bonuses.

In our example, with an annual premium of ₹10 lakhs for 20 years, the total investment sums up to ₹2 crore.

• Maturity Value (Approx.): ₹3,30,65,954 (annualized return ~5%).

While the policy does provide a safety net, the growth is minimal compared to the investment alternatives available.

Equity Investment Returns

Direct Equities have historically delivered 15% Plus  annualized returns over the long term. Let’s analyze the same ₹10 lakhs annual investment in equities for 20 years:

• Total Investment: ₹2,00,00,000.
• Maturity Value (Approx.): ₹10,24,43,583 (annualized return ~15%).

This substantial difference demonstrates the wealth-creating power of equity investments when compared to traditional policies.

Key Differences in Wealth Creation

1. Low Returns vs. High Growth

LIC’s traditional policies provide an annualized return of ~5%, which barely keeps up with inflation. Equities, on the other hand, deliver ~15% annualized returns, significantly outpacing inflation and multiplying wealth.

2. Opportunity Cost

By committing ₹2 crore over 20 years to LIC policies, investors limit their potential wealth to just over ₹3.3 crore. Investing the same amount in equities grows the corpus to ₹10.2 crore—a difference of ₹6.9 crore!

3. Flexibility and Liquidity

Equities offer flexibility to adjust investments or liquidate funds during emergencies. LIC’s policies lock the funds for the long term, limiting access and flexibility.

Why LIC’s Market Share Is Declining

Indian investors are now financially literate and are actively separating insurance and investment goals. This realization has impacted LIC’s market share, which dropped by over 10% in just one year. LIC is losing ground to:

1. Pure Term Plans: Affordable plans that provide higher insurance coverage.
2. Equities: Superior wealth creation instruments that align with financial goals.

The Smarter Financial Strategy

The most effective financial plan is to separate insurance and investment:

• For Insurance: Opt for a pure term insurance plan that provides comprehensive coverage at a low cost.
• For Investment: Channel funds into direct equities to build wealth over the long term.

Conclusion: Insurance Isn’t Investment

The comparison is clear:

Investing ₹10 lakhs annually for 20 years in LIC’s traditional policies will leave you with a modest ₹3.3 crore. In contrast, the same amount invested in equities would grow to ₹10.2 crore—three times the returns!

The lesson is simple: Insurance secures your life; investment builds your future. By understanding this distinction, today’s investors are moving away from outdated bundled policies and choosing strategies that ensure both financial security and long-term wealth creation.