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…