I came across a couple who is aggressively placing their savings in LIC Policies as part of tax-savings. They were having more than 5 LIC policies! Are these effectively savings??
Let us understand some maths that we are not actually saving anything with the popular reimbursement policies like LIC Bhima Gold, Jeevan Kattapoka etc. The hidden-danger is called Inflation!
What is Inflation?
Inflation is the depletion of purchase power on currency.
For example: If you can buy 1 kg. rice for 30 rupees, the next year it is coming to 32 rs. The average inflation is 4%-6% considering past 2 decades.
How we apply Inflation to LIC?
Imagine you have to invest 1 lakh for tax-savings. Without investment we have to pay 30% (30 thousand) as tax. Thus, we decide to invest 1 Lakh in an LIC policy. The policy will re-imburse the amount after 4 years.
Let us apply inflation here:
- Today: 1 Lakh having value: 1 Lakh
- After 1 year: 1 Lakh having value: 95 thousand
- After 2 year: 1 Lakh having value 90 thousand
- After 3 years: 1 Lakh having value 85 thousand
- After 4 years: 1 Lakh having value 80 thousand
So, after the period of 4 years we are actually getting 80 thousand value.
We thought we saved 1 lakh, but we are losing 20 thousand in value.
What is the solution?
We have to split the investment & insurance part here.
Take a Term Policy for Insurance purpose & Consider tax saving corporate-bonds or fixed-deposits or ELLS. This will give higher returns of 10-20% on your total corpus while having the same insurance coverage & tax advantages.
Term Policy: A 30 lakh term policy should be available less than 2000 rs. per year.
