In today's FirstScroll, we open up India's most loved money product, the LIC policy your parents trust completely. And we find something strange inside. It actually earns you less than a normal bank FD. So why do crores of people still buy it? Let's break it down, super simply.
The Story
You've seen this scene at home.
A parent proudly says, "Beta, I've taken an LIC policy for you. Best investment. Guaranteed returns. Plus life cover. Fully safe." And everyone nods, because LIC feels rock solid. Trustworthy. Safe like nothing else.
But here's the awkward part nobody in the room knows.
That "best investment" probably gives you less money than the simple FD lying in the same family's bank account.
Sounds crazy, right? Let's slowly understand why.
First, a quick refresher, because we're keeping this simple.
A fixed deposit (FD) is when you give the bank money, and it pays you a fixed interest, say 7% a year. Safe and boring.
An LIC endowment policy is when you pay LIC a premium every year for 15 to 20 years. In return, you get life cover (your family gets money if you die) plus a lump sum at the end. Two things in one. Sounds great.
Now the reality check.
A typical LIC endowment policy actually earns you about 5-6% a year. Some even less. One review of LIC's most popular plan, Jeevan Anand, found its real return was around 5%, which it clearly said is below FD rates.
Meanwhile, a plain bank FD has been giving 6.5% to 7.5% in recent years.
So read that again. You lock your money for 20 long years... to earn less than an FD you could break tomorrow. How is that even possible?
The secret is hidden in one word that agents love: bonus.
The "bonus" trick, explained simply.
When an agent sells you the policy, he says the magic line: "Sir, every year you get a bonus!" And your brain hears: my money is growing nicely.
But here's the catch.
That bonus is calculated only on your sum assured, which is just the fixed base amount of the policy. It is NOT calculated on your growing total. And most importantly, it does not "compound".
Okay, what's compounding? It's the most important idea in all of finance, so let's make it dead simple.
Compounding means earning money on your money, and then earning money on THAT too. Like a snowball rolling downhill, getting bigger and bigger.
Example: You put ₹100 in an FD at 10%.
Year 1: you earn ₹10. Now you have ₹110.
Year 2: you earn 10% on ₹110, which is ₹11. Now ₹121.
Year 3: you earn on ₹121... and so on.
Your money keeps building on itself. That snowball is what makes you rich slowly.
Now here's the sad part. LIC's traditional bonus does NOT snowball. Because the bonus is always calculated on the original base amount and never compounds, your actual return gets weaker the longer the policy runs.
So at the end of 20 years, LIC shows you a big fat bonus number, like "₹5 lakh bonus!", and it FEELS amazing. But when you spread that across 20 years of payments with no compounding, that big number quietly shrinks into a tiny 5% yearly return.
It's basically a magic trick. The total amount looks huge. The actual yearly return is weak. Your eyes see lakhs. Your wallet quietly earns less than an FD.
The bigger problem: it's two weak products taped together.
Here's the thing most people never realise. An endowment policy tries to do two jobs at once, insurance AND investment. And it's not great at either.
As insurance? Weak. The life cover you get is usually very small for the big premium you pay. If something happened to you, the typical cover wouldn't be enough to support your family for long, which is literally the whole point of insurance.
As investment? You already saw, a sad 5%.
Now here's the smarter way, and it's simple.
Instead of one product doing both jobs badly, split them:
Buy a term insurance plan. This is pure life cover. For a small premium, your family gets a huge amount (like ₹1 crore) if something happens to you.
Take the money you save and put it in something like PPF or an index fund, where it actually compounds and grows properly.
Do this for 20 years and "term insurance + investment" beats the endowment policy badly, on both protection AND returns. Financial experts have been saying this for years: if you want returns, endowment is the wrong tool, and if you want cover, term insurance is far better.
So now the real question.
If this product is so average, why do CRORES of smart Indians keep buying it?
The answer isn't that people are foolish. It's a clever mix of trust, emotions, and hidden incentives. Let's see why it just won't die.
Reason 1: The agent is literally your uncle.
This is the biggest one. LIC policies are sold, not bought. And the agent selling it isn't some random stranger. He's your relative. Your neighbour. Your dad's best friend. Your colleague.
And it's really, really hard to say no to someone you personally know and trust. When your favourite uncle says "beta, trust me, take this," you don't sit and calculate returns. You just sign.
Reason 2: Follow the money (the commission).
Okay, but why does uncle push THIS policy so hard, instead of a cheaper, better term plan? Simple. Money.
Endowment policies pay agents big, upfront commissions. An agent can earn 5% to 10% (or more) of your premium, and keeps earning it every year you pay, for decades. Some plans even give a 40% bonus commission in the very first year. A term plan, the one that's actually better for you, pays him almost nothing.
So the system quietly pushes the product that's worse for you but more rewarding for the seller. Even a famous Harvard study found this kind of mis-selling is common in Indian insurance, with agents suggesting whatever earns them more. It's not evil. It's just incentives doing their thing.
Reason 3: It forces you to save (a real plus).
Now, one genuinely fair point in LIC's favour. Many Indians find it hard to save money. The yearly premium acts like a forced piggy bank, you HAVE to pay it, so you actually save instead of spending it all.
For someone with zero saving discipline, a boring 5% locked away is honestly better than 0% blown on shopping. So as a savings habit, it does have real value.
Reason 4: Trust, tax, and tradition.
Finally, there's the LIC name itself. Government-backed, decades old, always paid up. For a generation that saw banks fail and chit-fund scams, that "totally safe" feeling is worth a lot, even if it quietly costs them returns.
Add the yearly March tax-saving rush (people grab any 80C product to save tax), plus the fact that the maturity money is tax-free, and you get a product baked into how India saves. People don't buy it after comparing returns. They buy it because everyone they trust already bought it.
So, why does your LIC policy give you less than an FD, yet crores still buy it?
Because it was never really sold as an investment. It was sold as safety, trust, and a favour to your uncle. That weak 5% return is the quiet price people pay for a familiar name, a personal relationship, and a forced-savings habit, all pushed by agents who earn the most by selling the thing that helps you the least.
This doesn't make LIC bad. Insurance matters. Saving discipline matters. But next time someone calls an endowment policy their "best investment," you'll know the simple truth.
It's a cosy safety blanket... wearing the costume of a great investment.
And the smarter move is almost always the same: buy cheap term insurance for protection, and invest the rest where your money can actually grow and snowball.
Until next time...
