A Monthly Income Plan From a Life Insurer vs. A Do-It-Yourself Monthly Income Plan

by Vinaya HS on May 21, 2012

in Finance

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A few days back, I happened to see an ad for this Monthly Income Plan from MetLife, a life insurance company. In this plan, you’re supposed to pay the premiums for about 10-years and then post these 10-years of paying premiums you’re guaranteed a fixed monthly income for the next 15-years.

As it always happens, I immediately started to think if a Do-It-Yourself (DIY) Monthly Income Plan (MIP) would be much much better off for you (after all why would you ever want the monthly income to stop after X number of years?) than a monthly income plan from a life insurer. In the MetLife plan, there are some complexities involved around your death and the related death benefits (since this is an insurance-cum-investment plan) but we’ll ignore all of these since I assume that you’d want to enjoy the monthly income in your own hand and not eye it virtually (!) from up above.

In the product brochure of the MetLife Monthly Income Plan (click here to download the product brochure), the following example illustration is shown –

Image of an example benefits illustration from the MetLife Monthly Income Plan product brochure

You can see from the above illustration that you pay Rs 35,541 each year for 10-years and then you get back Rs 2,500 per month for 15-years. After 15-years, the monthly income stops!

But what if you think a bit different from everybody else, don’t mix insurance and investment, and go for a do-it-yourself monthly income plan? Here’s what the above illustration would turn into –

Image of a do it yourself monthly income plan at a 6 percent rate of interest

You’d get the same Rs 2,500 per month in perpetuity! You could open a new Fixed Deposit each year for 10-years and implement this plan. It’s as simple as that. Or, you could even open a Recurring Deposit with a monthly payment of Rs 3,000 per month. There are many options. But what’s more important is that you stay in complete control of your money (it’s in front of your own eyes).

For the purpose of comparison with the insurance plan, if your DIY MIP were to earn an 8% rate of interest, here’s what your monthly income would look like –

Image of a do it yourself monthly income plan at an 8 percent rate of interest

About Rs 3,700 per month in perpetuity! (The insurance plan still continues to pay out only Rs 2,500 per month.)

And at a 10% rate of interest, here’s what your DIY MIP look like –

Image of a do it yourself monthly income plan at a 10 percent rate of interest

More than Rs 5,000 per month in perpetuity! (The insurance plan still continues to pay out only Rs 2,500 per month.)

Finally, the corpus left over (the maturity benefit figure in the insurance illustration) from the insurance plan is seriously laughable when you compare it with the corpus left over from your DIY plan.

So, why would you ever want to give your hard-earned money to a life insurer?

What do you think?




Thanks for reading this article. I'd love to hear your opinion. Please use the comments section below to share your thoughts. I frequently write new articles that also cover several other aspects of personal finance including credit cards, financial goals, health insurance, income tax, life insurance, mutual funds, retirement planning, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.

{ 13 comments… read them below or add one }

Indian Thoughts May 21, 2012 at 10:56 AM

I have shown several such excel sheets to some of people who just love LIC.
Their excuse for sticking with LIC is I will not be able to save enough money for FDs each year (RDs each month). LIC policy premium is just one more bill to pay.

Mental accounting at its worst.. what do you say?

Chinmay Albal May 21, 2012 at 11:33 AM

Nice post!!
How would you compare starting an RD v/s PPF. Since returns on PPF are compounded and not subject to tax whereas returns on RD can be taxed according to your tax slab.

Rakesh May 21, 2012 at 5:47 PM

@Vinaya,

Excellent analysis, very good use of charts to explain returns.
Make sense to do it yourself but there are people who are lazy and will fall prey to such plans.

Tushar Jain May 22, 2012 at 11:17 PM

The first thing that strike me when I read this plan was similar to what Chinmay has pointed out… Why not put the money in PPF and enjoy EEE benefit rather than putting my hard earned bucks in such a stupid plan…Let it grow at 8.5% for 15 years and after that use the corpus.

Vinaya H S May 23, 2012 at 7:27 AM

@Indian Thoughts –

I seriously wonder how anyone could love any policy from LIC. Do you think you’d be able to share some of your analyses over here? Perhaps as a guest post?

@Chinmay –

That’s actually a good idea for a post. Will work on it.

Vinaya H S May 23, 2012 at 7:45 AM

@Rakesh –

From what I’ve seen, if you’re lazy with your finances now then they’ll be equally lazy with you in future.

@Tushar –

Yeah. What’s worse about these insurance policies is that you have no clue what the accumulated corpus and how it’s being accumulated.

Siddhant May 23, 2012 at 2:07 PM

Insurance companies have never been good in giving Financial Investment Plans neither they are expected to, Insurance companies in India thrive because of only 1 factor & that is lethargy/laziness of people in India. I think it is a big paradox… Insurance is planning for death & investment is planning for life, I do not see any way how both can be done in one product…..

Vinaya H S May 24, 2012 at 8:59 AM

@Siddhant –

Very well said! Insurance is planning for death and investment is planning for life. Wow! I’ll probably steal this in one of the upcoming posts.

Siddhant May 24, 2012 at 4:32 PM

No problem friend, But do post my calculator also so i may benefit with some viewers.

T S Ashok May 24, 2012 at 5:15 PM

Very good trapping plan from Metlife.. I surrendered a policy from TATA (Maha life..) which gives the income upto 100th age. I thought it was worse. But , here, it gives only for 15 Yrs.. ha ha . Worst o worst..God should save the people..

Vinaya H S May 24, 2012 at 9:39 PM

@Siddhant –

Sure. Will do. :-)

@ T S Ashok –

What were the terms and conditions of your Tata Maha Life Policy? How much premium were you paying and how much income was promised?

T S Ashok May 25, 2012 at 3:40 PM

I need to pay a premium for 12 years (say 15k/annum), then they will give me around 12k per annum upto my 100 years. you also gave a detailed page in your blog once upon a time with many calculation and how a customer is cheated like that.. Remember!!

Vinaya HS May 27, 2012 at 5:24 PM

@T S Ashok –

:-) That was quite some time back. Thanks for continuing to read Capital Advisor.

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