I don't know which policy you are talking In my opinion if your are going for a life insurance, then go for term insurance plan. For a 40 yr old, for a sum assured of Rs. 2500000 and for a term of 20 yrs the annual premium stands at Rs. 12,025 only (For LIC Amulya Jeevan, Table no. 190, as per their website) . The only drawback is that you don't get a single penny if the risk doesn't happens during the insured period. But it is the most profitable option to the life insured. The balance amount (Rs. 16000 per yr) if you invest in PPF you will earn interest @ 8% compounded annually. If you continuously go on investing the balance amount in PPF a/c then after 20 yrs you will get total Rs 763,928.
The final amount obtained from the PPF a/c follows EEE tax policy plus any court decree cannot freeze your PPF a/c (to the best of my knowledge, you may inquire this further) plus loan option available after 3rd yr onwards (this option is also available with some insurance policies) plus partial withdrawal option available from 5th or 6th yr onwards (i am not sure about the exact year). In case of insurance policy the withdrawal option is totally dependent on the insurance company ( in the form of bonuses ). Plus your PPF a/c is purely Govt. a/c whereas your insurance policy is not maintained by the Govt.(even the LIC is a Govt. undertaking not a fully Govt. remember the case of VSNL) so making it less riskier than an insurance policy.
The insurance agents will generally push for insurance plan for which he/she gets higher commission. Better for you try to push him for this policy. Ask him to show him documentary proof showing his commission rates for different policies, after all its your money from which he is paid. For the above plan he gets only 2% of the premium per yr that you pay. There are many plans for which he may even get upto 35% per yr. A rule of thumb, more you pay for a sum assured, higher the commission the agent gets.
In my personal view LIC is the best insurer because of their claim settlement ratio, branches, Govt. backing and years of service. May be you have to pay more as compared to others but it is the service that should matter that they offer to your family in your absence.
At the end remember one thing "NEVER TRY TO MAKE YOUr INSURANCE POLICY EARN, IT'S FOR YOUR FAMILY NOT FOR YOU"