Dear Friend,

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Best Wishes!!


Saturday, September 12, 2015

Are Term Insurance Products that Return your Premium - Worth Buying?

If you have been a reader of this blog, you would know by now that I am a strong supporter of Pure Term Insurance Products that offer big lumpsum payouts for little premium each year. However, most of our fellow citizens feel the premium as "Being Wasted" if they outlive the policy and hence dont sign up for this product even though it is an Absolute Must. Sensing this feeling that people feel their premiums as being wasted, Insurance Companies have now come out with a new tranch of Term Insurance Policies that actually are targeted at this fear. The purpose of this article is to understand what they are and analyze if they are Worth Buying...

So, What Are these Premium Return Term Life Policies?

These are a type of Pure Term Life Insurance products that pay a lump sum to the survivors in case of loss of life of the Insured Individual during the policy duration. And, if the insured individual out-lives the policy term, the company will refund all of his premium - Yes, REFUND ALL PREMIUMS PAID...

That sounds like a wonderful proposition isnt it?

One of the biggest worries for Indians is the fact that, If I Outlive my policy, the premium I paid is going waste to the Insurance Company. Now, if the company is returning my premium then Excellent. Right?

Example Premium Return Policies: 

I was searching the Internet for such policies in India and have listed below a few that allowed us to calculate premium based on the info in their websites. 

I am calculating Premiums for Mr. X who is 33 years old, Male, Non Smoker for a Coverage of 1 crore for the maximum allowed policy duration and premium payable duration.

1. Max Life Premium Return Protection Plan

Sum Assured: 1 Crore
Premium Payment Term: 11 Years only
Policy Coverage Term: 30 years 
Policy Benefit: 100% Sum Assured Paid out if Policy Holder dies during policy term
Premium Per Year: 1.28 lakhs 

So, Mr. X has to pay 1.28 lakhs for the next 11 years to get a 1 crore coverage for the next 30 years and if Mr. X survives this policy and reaches the age of 63, Max Life will return the premiums he paid - 14.11 lakhs in full. 

2. Aviva iShield Premium Return Plan

Sum Assured: 1 crore
Premium Payment Term: 25 years
Policy Coverage Term: 25 years 
Policy Benefit: 100% Sum Assured if death happens between years 1 to 10. 110% sum assured paid out if death happens between years 11 and 20. 120% sum assured paid out if death happens after 20 years. 
Premium Per Year: Rs. 43,574/- 

This Plan actually returns 110% of the Premiums Paid if policy holder survives the policy. So, if Mr. X survives the policy duration of 25 years, then he will get back the 11.9 lakhs which is just 110% of the premiums he paid over 25 years. 

3. Aegon Religare iReturn Insurance Plan 

Sum Assured: 1 Crore
Premium Payment Term: 20 years
Policy Coverage Term: 20 years 
Policy Benefit: 100% sum assured paid out if policy holder dies during policy duration 
Premium Per Year: Rs. 24,633/- 

So, if Mr. X survives the policy and reaches 53 years age he will get the 4.92 lakhs he would have paid as premium. 

There are many more such products like - Shriram Life Cashback term plan, TATA AIA iRaksha etc... 

By now, are you thinking about buying this policy - Arent You?

You are getting a 1 crore coverage plus tax benefits and to top it all off, you will get back your premium if you survive the policy. 

Before you take that decision, I would recommend you read the reminder of the article...

So, What Do I Think of these products?

NO, I dont think You Should be BUYING these products. 

Reason 1: Super High Premiums 

If Mr. X wants a 1 crore coverage for 25-30  years in a traditional Pure Term Insurance plan where he gets nothing at maturity, he will be paying on around Rs. 8,000/- to 12,000/- as premium depending on which Insurer you want to select.

As you can see, though these guys are returning your premium, the amounts they are charging are many times higher than what these traditional term policies are charging…

Reason 2: There is No Free Lunch

Did you really think an Insurance Company would offer a policy that isn’t beneficial for them? Yes, they are returning your premiums but you are forgetting one important point – They are returning ONLY the Premium. The 10-20 years that they are holding the premium is unaccounted for.

Calculation 1: If Mr. X Invested Rs. 1.28 Lakhs for the first 11 years and let the corpus grow at just 6% for the next 19 years – he will have a total of 61.46 Lakhs at the end of the 30th year.

If he had purchased a traditional term product for the same 1 crore where he pays premium of 12,000 for 30 years, he would have paid Rs. 3.6 lakhs in 30 years. If we deduct this from 6.146 lakhs, he would still be left with 57.86 lakhs.

However, if he had purchased the Max Life product he will be getting only 14.1 lakhs that he paid.

Calculation 2:  If Mr. X Invested Rs. 43574 every year for 25 years and lets the corpus grow at just 6%, he will have Rs. 25.34 lakhs at the end of the 25th year.

If he had purchased a traditional term product for the same 1 crore where he pays premium of Rs. 12,000 for 25 years he would’ve paid 3 lakhs in total. If we deduct this from the 25.34 lakhs, Mr. X would be left with 22.34 lakhs.

However, if he had purchased the Aviva product, he would only be getting 11.9 lakhs (110% of the 10.89 lakhs he paid)

Calculation 3: If Mr. X had invested Rs. 24633 per year for 20 years and let the corpus grow at just 6% he will have Rs. 8.81 lakhs at the end of 20 years.

If he had purchased a traditional term product for the same 1 crore where he pays Rs. 12,000 for 20 years he would have paid 2.4 lakhs in total. If we deduct this from the 8.81 lakhs, he will still be left with 6.41 lakhs.

However, if he had purchased the Aegon Religare product he would only be getting his premium of 5.1 lakhs.

The Surprising Fact here is, I am only counting a 6% as nominal rate of returns. Even a Fixed Deposit actually offers us around 8-9% returns and if we consider a mutual fund SIP we can target an average of around 10-12% returns over a 20 or 30 year period.

Now think again – Are these products really a good choice to purchase?

As I have said multiple times, don’t get attracted by these fancy sales jargons. Yes, these people are returning your premiums but are pocketing the interest you would have made had you invested the money yourself and purchased the traditional term life product from the same insurer. So, better STAY AWAY From these products..

Happy Insuring Yourselves…
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