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 .
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 …
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 .