Recently a LIC agent visited my house, I didn’t buy any policy as my life insurance goals are already covered. But the conversation (which was almost 2 hours) made me think about a question.
Is LIC of India still a good option? If you are looking to buy a pure insurance product, LIC is comparable to other insurance companies. If you are looking for endowment, money back, etc (a policy which provides a return on the premium paid, on maturity), the story changes completely. The low returns LIC makes on its own investments. Continuous government interference in investment and other related decisions. The highest rate of commission paid to agents. Opaqueness about the past performance of policies related to the rate of return. Based on these factors it appears that LIC is not suited for providing the best rate of return on your investments.
Investment vs Insurance Defense for LIC:
While doing my research I talked to a few LIC agents, agents of other insurance companies, and financial advisors. A common statement I came across was, you should not judge an insurance company based on the returns it offers. Insurance and investment are a completely different matter and should be kept separate.
Without going into a discussion of insurance+investment products being good or bad, I present the following facts.
- For a major portion of its history, LIC didn’t offer a pure insurance product.
- In India insurance products that offer premium+returns at maturity (or at a pre-decided time) are most popular.
- Almost all LIC agents market the products by highlighting the returns that can be made.
- Endowment and money-back policies form the largest chunk of LIC’s premium collection.
- The major portion of policies sold by LIC are investment+insurance plans, thus they should generate decent returns for policyholders.
So in light of these, we cannot avoid the question of returns offered by the policies of LIC. Matter of the fact is that return on the premium paid is one of the most important criteria by which people judge a policy.
How Does a Life Insurance Company Work?
People pay a premium to the insurance company. The insurance company pays the insured amount in case of death or the maturity amount. In addition to this, the insurance company has to pay commission to its agents. The operational cost like salaries, electricity, rents, etc is also there.
So where does the additional money comes from? An insurance company invests the money it gets as premium. The investment is made in equity, government bonds, directly in various companies, etc. The return from these investments is used to cover all the costs and profit. The rate of return also affects the bonus and return offered to policyholders.
This makes the investments and management of these investments the most crucial aspects for any insurance company whether it is LIC or any other.
What is Wrong With LIC?
We have established some basic facts which affect our query. Now let’s come back to the original question and discuss the answer we gave in the first paragraph.
Factors which make the LIC a bad option:
Return that LIC made on its investments in the last decade
It is hard to know the exact details about all the investment made by LIC. Yet, we can get very reliable estimates by going through the financial reports of LIC, available in the public domain. The picture that these estimates paint is not at all rosy. In the last decade, there have been quite a few years when the return on these investments was even lower than the yield of 10-year government bonds.
If you go even further and check data for the last 2 decades, results are even worse. There were years when the rate of return on investments was even lower than the rate of inflation.
Now you can say that this is not true for every year. You can also say that the rate of inflation was extraordinarily high during the concerned years. But, expecting a giant like LIC to earn better returns than government bond is, according to me, a very low expectation. LIC has even failed this for the majority of years in the last decade.
Continuous government interference in investment decision
LIC has a huge corpus of funds, and among numerous PSUs, it is a success story. How does the government treat this successful company? As their piggy bank of last resort.
On numerous occasions, throughout its history, LIC has bought government bonds to finance/manage the government’s fiscal deficit. Further, the government has regularly made LIC invest in cash-starved PSUs. LIC has also come to the rescue when disinvestment plan of government by public issues was failing.
In the public domain, these investments are justified, but any unbiased analysis can uncover the truth. LIC has also made major investments in the Public Sector Banks even when we have daily news of borrowers defaulting on huge loans. LIC now owns 15% to 20% of numerous PSUs. Which any financial advisor can tell you is a huge risk. Even an individual investor is advised to not concentrate his investments in a single company/sector.
The highest rate of commission to agents in India
LIC is the first choice of a person wanting to become an insurance agent. The reason being that LIC pays a huge percentage of the first-year premium to its agent as commission. For some policies, it is even more than 30% (very few and it includes bonus commission). On average, an agent can earn anywhere from 15% to 25% of premium in the first year.
What would you advise someone who is not earning much and their investment decisions are controlled by others? Spend more or less?
Opaqueness about the past returns of policies
LIC collects a huge chunk of premium from the endowment and money-back policies. Why? Because these plans have the highest commission for agents, so agents sell (missell) mostly these. If you go through LIC’s website or talk to the agent, you cannot find the actual returns these policies have made. The agents will tell you, in how many years your money will double, but never the rate of return.
If we go through the actual maturity amount people get, it turns out that 7% is the best rate LIC’s policy has offered. Even this 7% is based on very rosy and lenient calculations. Add to this the average rate of inflation of the last decade and the value of these returns shrinks further.
So, Is LIC a Good Investment Option?
LIC has a huge capital, even the unclaimed money is mind-boggling. Further, it has a sovereign guaranty. A last-ditch factor is a large scale of real estate LIC possess.
So your money is not going anywhere and the term insurance policies you were planning to buy, you can go ahead. But when it comes to the policies which offer insurance+return, the problem arises. LIC cannot offer you the best return on your money. The restriction LIC faces can only allow a very low rate of returns for you as a customer. Many of these problems are uniform for all traditional plans (detailed analysis here), but LIC takes these problems even further.
* Remember the agent saying your money will double in X years. Divide 72 by the number of years (X) and you will get a pretty good estimate of the rate of return on investment.