Why do people buy LIC Policy when the returns are so bad?

Why do people buy LIC Policy when the returns are so bad?

Great question with even interesting answer. It could save you a fortune in life, if you understand the spirit behind this answer. Here is what I would say:

1. Notion of implied govt guarantee: People in India tend to believe that LIC has an implied govt guarantee. Most Indians looking for safety of their money, think LIC is the best for them. It is like saying that your money is safer in SBI & not in private banks !! Really ? So the safety seekers are more likely to invest in LIC, even though the returns are very average in most LIC endowment based plans. If you are happy with 4% odd kind of returns, all the best to you.
2. Indian custom to buy LIC, passed through generations: LIC has the most entrenched network of advisers & its a legacy of 50 plus years. It has become customary to buy LIC, atleast your dad is bound to recommend you the same once you start your first job. However the fact is that the times when 4% returns from LIC were good(1950s to 1980s) are long gone. With inflation running 9% for a decade, LIC plans have been a big value destroyer for most. Unfortunately, it takes 2 decades for you to realize that you have lost money on LIC investment. So most people don’t even understand the 4% returns I am talking about from LIC.(& reading this, some are still thinking that their policy is something unique & will be much profitable than usual 4% that “others” may get)
3. The great Indian social obligation: The LIC agent is mostly a known social person from the same locality. It becomes almost obligatory to buy policy from agents, even if you know that you don’t understand the investment. Also what is the adviser’s interest in pushing the plans ? Of course, LIC is one of the best in commission payouts largely because of the nature of the policies sold(endowment plans). Whats worse, there is no accountability on returns since most plans work on 20 plus years tenure. So you can’t even confront agent like you can in case of ULIP/market linked plans. You tend to feel that your investment are good & guaranteed !!
4. The same old (mis) selling pitch: Most importantly, majority (tempted to say all) LIC agents almost have a similar pitch. They almost never talk to you about “annualized returns”. The pitch is “your money grows 4 times in 20 yrs…..6 times in 30 yrs, etc”. Most people can’t calculate what the annual % returns are. Fact is most returns are 3.5% to 5% max. But it is never stated clearly on paper & the agent gets away by quoting “additional bonus” & other stuff. No clear track record of past annual returns % ( considering all bonuses) is disclosed by LIC. This actually helps the agent & LIC supports this by not taking any efforts to curb this mis-selling. Who will buy any policy if it were known that returns will be 4% only ??
5. The smart financial buyer (at-least this is what he thinks): Finally, the Indian buyer thinks that he is being smart by taking a small percentage of the commission from the agent. What he certainly doesn’t realize is that the “cut” he takes in first year is just a small fraction of the money that the agent & LIC will make year on year. The Result: The customer buys some flimsy dreams from LIC, gets stuck with a poor product that can’t even beat inflation & can’t even get out of the policy going forward.

If LIC policy made serious money, entire India would have been a much richer nation.There is nothing “intelligent” about investing in LIC. Something that soo many Indians do without thought is never going to make you rich. Is that too difficult to understand ? You decide.

Hope the above points help you understand the key reasons why LIC & traditional endowment plans even by private insurers, still dominate the Indian market.