Return of Premium Term Insurance , Is it Worth !!

Term Insurance is the best form of Insurance , but why not take “Return of Premium Term Insurance” Policy , which is same as Term Insurance , but with return of all your premiums back , in case you do not die :) , Which is better is a common question now ? Let us do simple maths and analysis our self . If you know little bit of maths , you can be far better than many by analysing things your self . So how do we find out which is better ? “Simple Term Insurance” OR “Return of Premium Term Insurance”

Its too simple to find out . Just try to come up with a plan which beats or does better than “Return of Premium Term Insurance” , If you can beat it , than Simple Term Insurance is better else its not !!

Let us take an example scenareo …

ING Vyasa has a “Return of Premium Term Insurance” plan called as ING TERM LIFE PLUS” , click on the “Benefit Illustration” link in the middle of the page and it gives a following example for regular premium .


Company also provides two types of payements :

a) Mid Term Benefit: On the Life Assured surviving to half the policy
term, the Company will return 40% of the regular premium or 20%
of the single/limited premium, as the case may be, excluding the
extra premiums if any paid by the Policyholder.

b) Maturity Benefit: On the Life Assured surviving to maturity, the
Company will return the total premiums paid without interest,
after deducting the policy mid term benefit and extra premiums if
any paid by the Policyholder

So the numbers look like this :

Age : 35 yrs
Total Duration : 20 yrs
Cover : 12,00,000 (12 Lacs)
Yearly Premium : 10,653
Maturity Amount : 213060 (amount he paid during 20 yrs , 10653 * 20)
Death Benefit : 12 Lacs

Can we achieve the same thing or better with 10,653 per year ?

Lets take a simple Term Insurance + PPF combo

From Religare Aegon , I got that Insurance premium for 35 yrs old for amount of 12 lacs and duration of 20 yrs is Rs 3721 (after tax) .

So if we pay 3721 out of 10,653 for Insurance , we are left with Rs 6932 (10,653 – 3721) .

If we invest this Rs 6932 per year in PPF for 20 yrs , @8% , we would get 3.4 Lacs . Which beats ING amount of 2.1 lacs . Now this is the safest way of beating it . No questions behind it !! .

With SIP in mutual funds

For a investor who can invest it in Mutual funds through SIP , assuming a acceptable 12% return , it would be around 6.9 lacs in 20 yrs .

Now the question is what is the benefit of “Return of Premium Term Insurance Plans” ?

Ans : No benefit , Now a days Insurance companies have realised that people are understanding the importance of Term Insurance , so the next idea for them was to build something on top of Term Insurance , give a “feel” to customers that “they don’t loose on premiums also” and present a product which looks “irresistible” to them . But they forget that there is something called as “Maths” in this world .

Conclusion : So If you have to take Insurance , Just go for plain Term Insurance , Dont go for Return of Premium Term Insurance , There premiums are too high .. its always better to use extra money to make other investments :)

That’s all for now …

Comments/doubts/disagreements !!

Question for you : How will you deal with an agent who wants to sell you this product ? Or How will you even convince your friends who fell in the trap of these products ?

I have posted articles on Technical Analysis which teaches some simple things investors can use to Buy and Sell stocks , you can read Part 1 and Part 2 . I will soon come up with Part 3 and 4 .

Final Note : The best products in this world are “Simple” . I consider Term Insurance as product of the Century !! , nothing can beat it !! :) . Do simple maths with idiotic products which comes in markets , you will know if its worth or not .



247 CommentsAdd Comment

  1. sameer

    hi Manish,

    I have simple question for you on this, I think you have posted in some other post about the tenure of the term plan. if you know(high probability) that you are going to survive more than 70 years of age then take cover only for years when your family is dependent on you(for income purpose) i.e. till 60 years. so if I already investing in ppf & mutual funds already then would it be better that I go for term plan with return of premium? I understand I would be paying more but as you mentioned anyway I am going to survive full term of the policy so I would atleast get my money which I gave to insurance company. Is it correct way of think?

    Please advise as I am planning to buy term insurance with rop in next couple of days.

    Thanks
    Sameer

    • No Sameer

      Its not correct way to think. You are not taking into account VALUE OF MONEY concept. The money you will get after the full tenure, just think how much it will be after 25-30 yrs , it would be peanuts at the end and at that time, it will not help you at all .. So right now just go for normal term plan and any extra money use for investments.

      Manish

  2. Ravikiran

    Hi Manish,
    My name is Ravi and I am staying in Bangalore.
    I am planning to get a term policy worth of 50lkh coverage and also I would like get return on my investment if incase nothing bad happens to me. So I contacted SBI and they said they have a plan where I need to pay 28600 for 30 years and as I said if nothing happens to payee he will get 28600*30=858000.
    After reading your comments I am in doubt whether I need to go for term policy with return on investment or just go with simple term policy and invest in mutual funds.
    My age is 32
    My investments:
    LIC:32400 Per year
    MF(ING):48000 Per year
    MF(RIL):35000 Per Year

    Br
    Ravikiran

  3. Sandeep Chandrashekhar Pawar

    Dear Manish,

    Thanks for the Mathematical explaination however scenario changes if we go for higher coverage value e.g 1.2 Cr instead of 1200000 as Term insurance is meant to pay all your debts plus provide enough income to your family for all those rest of the years one whould have been earning. In such case, the premium difference is coming out to be 10000 ( regular term plan (max life) 14700, premium return plan (aegon religair 24000 with coverage 1.2 Cr & return of premium) Do you still suggest to go for regular term plan in this case say for 20 Yr policy term?

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