The Real Return on Savings-Type Insurance Is Low
Savings-type insurance products such as education endowment policies (Gakushi Hoken) and low-surrender-value whole life insurance are popular for "combining protection and savings," but they are inefficient as wealth-building tools. For example, an education endowment policy with a 105% return ratio over 18 years translates to an annualized return of only about 0.27%. Investing the same amount in an index fund at 5% annual return would grow to roughly 1.4 times the principal over 18 years.
The reason savings-type insurance yields so little is that a portion of premiums goes toward death benefits and the insurer's operating costs. Only about 70-80% of premiums are actually invested, with the rest consumed by protection costs and fees. It is more rational to separate protection and savings: secure coverage cheaply with term life insurance and invest the difference.
A Numerical Comparison - Insurance vs. Investing After 18 Years
Let's compare paying 15,000 yen per month for 18 years. With an education endowment policy (105% return ratio), total premiums of 3.24 million yen yield a payout of about 3.4 million yen - a gain of just 160,000 yen. Investing the same 15,000 yen per month in an index fund at 5% annual return produces approximately 5.24 million yen after 18 years, with investment gains of about 2 million yen.
Furthermore, term life insurance (10 million yen death benefit) costs only about 1,000-2,000 yen per month. If you allocate 2,000 yen of the 15,000 yen to term insurance and invest the remaining 13,000 yen, you secure death protection while accumulating approximately 4.54 million yen after 18 years - far exceeding the endowment policy's 3.4 million yen.
When Insurance Has the Advantage Over Investing
Savings-type insurance does have some merits: the tax deduction for life insurance premiums (up to 40,000 yen annual income deduction), the forced savings effect (early surrender results in a loss, which discourages quitting), and the peace of mind from built-in protection. For those with a high psychological barrier to investing who lack confidence in maintaining a regular investment habit, savings-type insurance can serve as a "second-best" option.
However, the tax advantages of NISA and iDeCo far exceed the insurance premium deduction. By learning the basics of investing and setting up automatic index fund contributions, you can achieve a "forced savings" effect equal to or better than insurance while expecting significantly higher returns. Books comparing insurance and investing make the cost difference between savings-type insurance and mutual funds crystal clear.
Freeing Up Investment Capital by Reviewing Insurance
If you already hold savings-type insurance, whether to surrender it and switch to investing requires careful judgment. If you enrolled recently, the surrender value will be far below the premiums paid, locking in a loss. On the other hand, if the return ratio is approaching 100%, the benefit of surrendering and redirecting to investments is substantial.
As a rule of thumb, compare the surrender value against the total remaining premiums. For example, if an education endowment policy matures in 10 years with a 103% return ratio, compare that against what the remaining 10 years of premiums would yield at 5% in an investment account. In most cases, switching to investing comes out ahead. Introductory books on investing help you draw the line between risks that should be covered by insurance and assets that should be grown through investing.
Next Steps - Finding the Optimal Insurance-Investment Mix
If you are considering new coverage, make term insurance plus NISA your default choice. Calculate the required coverage as: survivors' living expenses x years needed - survivors' pension - current assets. Once you know the coverage amount, choose the cheapest term policy and direct the remaining budget to NISA contributions.
Use our simulator to see how redirecting the premium difference into investments affects your future asset balance. The numbers will make the rationality of "protection through insurance, wealth building through investing" immediately apparent.