For decades, the standard financial advice given to middle-class Indian families was this: buy an LIC policy. It will give you life cover and also give you money back after 20 years. Two benefits in one product.

This advice has cost Indian families an enormous amount of wealth. Not because the companies are dishonest but because mixing insurance and investment in a single product is almost always a bad deal for the customer.

How these products work

Endowment plans, money-back policies, and ULIPs all follow a similar logic. You pay a premium. Part of it goes towards life cover. Part of it goes towards an investment component. At the end of the term, you get back some amount.

The problem is that neither the insurance nor the investment part is optimised. The life cover you get is usually far lower than what your family would actually need. And the returns on the investment component are typically 4 to 6 percent, well below what a simple mutual fund SIP would deliver over the same period.

The real cost of mixing

Consider a 30-year-old buying an endowment plan with a premium of Rs. 50,000 per year for 20 years. At the end, they receive perhaps Rs. 15 to 20 Lakhs.

Now consider the same person buying a term insurance plan for Rs. 5,000 per year (adequate cover, pure protection) and investing the remaining Rs. 45,000 per year in mutual funds at a conservative 10 percent CAGR. After 20 years, the mutual fund corpus would be approximately Rs. 2.9 Crores.

The difference is not small. It is the difference between a modest sum and a life-changing corpus.

What term insurance is and why it works

Term insurance is pure protection. You pay a premium. If you die during the policy term, your family receives a large sum. If you survive, the premium is gone and you receive nothing back.

That is exactly how insurance should work. Insurance is not an investment. It is a financial safety net for the people who depend on you. The goal is to get the highest cover for the lowest cost, which is precisely what term insurance delivers.

A 30-year-old in good health can get Rs. 1 Crore of life cover for approximately Rs. 8,000 to 12,000 per year. The same cover through an endowment plan would cost several times more.

When should you consider ULIPs

ULIPs have improved significantly over the last decade. Modern ULIPs from reputable insurers have lower charges and more flexibility. For some investors with specific tax situations or investment horizons, they can make sense.

But as a default recommendation for most Indian families, a combination of term insurance plus mutual funds will outperform a ULIP in almost every scenario over a 15-plus year period.

What to do if you already have these policies

Do not cancel immediately. Assess the surrender value, the remaining premium commitment, and the tax implications. In some cases it makes sense to continue a policy to maturity. In others, surrendering and redirecting the premium to mutual funds is better.

This is an analysis worth doing with a qualified advisor who can look at your specific numbers. At Nandi Nivesh, this is one of the first reviews we do with new clients. Many families are surprised by what they find.