Benefits Of Compounding

Life insurance is a long term product that provides you the benefit of compounding while ensuring that your loved ones are taken care of. Compounding helps you accumulate wealth better. It refers to the re-investment of income (plus interest) at the same rate of return, year upon year. The benefit from compounding mainly arises from the fact that the income keeps growing the principal to generate higher returns each year. Life Insurance in a way, forces you into a steady habit of savings better than other financial products do.

Life insurance is a long term product that provides you the benefit of compounding while ensuring that your loved ones are taken care off. Life insurance in a way, forces you into a steady habit of savings better than other financial products do.

Compounding refers to the re-investment of income (plus interest) at the same rate of return, year upon year. The benefit from compounding mainly arises from the fact that the income keeps growing the principal to generate higher returns each year.

For example (graphs to be created): Suppose you invest Rs.100 today @ 10% compounded rate every year, you will receive Rs. 110 (Rs. 100 + Rs. 10) next year. Why Rs. 10? Rs.10 is 10% of Rs.100!

Okay so now one year has passed. You have Rs. 110. The next year you will get Rs. 121 (Rs. 110 + Rs. 11.) Why Rs. 11? Because Rs. 11 is 10% of Rs. 110!

So, Rs. 100 you invest today will be equal to Rs. 612 after 20 years at a 10% growth rate! Similarly, Rs. 1 lack invested today will be Rs. 6.12 lakhs after 20 years at a 10% growth rate!

The benefits of compounding are further enhanced if you were to invest a portion on your money every year. For Example: You invest Rs. 1,00,000 every year for the next 20 years, assuming a compounded annual growth rate of 10% per annum. At the end of 20 years, you receive Rs. 63 lakhs against Rs. 20 lakhs invested by you (Rs. 1,00,000 X 20 years).