These days term insurance plans with return of premium or term plans with maturity benefit are very popular and everyone is asking are they really worth buying? Recently I had a similar discussion with one of my friend and there I tried to explore how these kind of term plan works against typical pure term plan.
In this article I will not share much gyaan, rather I will show you a straight forward calculation based on various assumption and also show how these kind of term plan with return of premium is a failure product compared to a typical term insurance plan.
How much you are spending for a Pure Term Insurance Plan?
First of all, let us set some parameters based on which we will judge both kinds of term insurance plans.
- Age of person: 30 years
- Policy Term: 20 years
- Premium Paying Term: 20 years
- Sum Assured Value: 1 Crore [These days 1 Crore term plans are very popular]
Now if we use hdfc click to protect plus premium calculator, the premium for this data will be around Rs 7,806 considering the life cover option.
So, in next 20 year you are going to pay Rs 7,806 X 20 = 1,56,120. And as per term plan conditions, you are not going to get the money in case you are survived till the policy term.
So, total loss of money = Rs 1,56,120
How Much You Need To Spend for Term Plan With Return of Premium
To do the calculation for such policy, I will consider a similar premium return plan from Aegonlife, iReturn term plan. I have used the online premium calculator for Aegon Life and found the premium amount for this policy will be around Rs 28,704.
That means in next 20 years you are going to pay = Rs 28,704 X 20 = Rs 5,74,080. But the good news here is that you are going to get the entire money, Right !!. That means “No Loss” ? Here you are doing the big mistake.
Let me explain this in a different way
If I consider the first case then how much money you are spending every year for this 2nd term plan?
Extra premium = 28,704 – 7,806 = Rs 20,898 / year.
Now let’s invest this money for next 20 year annually and considering a 8% return let’s find out how much money this will be. I am not considering the inflation here to find out net benefit or gain, as its not required here.
So, debt instrument like PPF or NSC can give this kind of return in long term or say 20 years. If you invest this money in mutual fund, then the return will be definitely very high compared to this 8%. But just to understand this calculation, let’s say 8.1% interest every year [considering PPF account interest rate for FY 2016-17].
So, your Rs 20,898 / year will become Rs. 11,23,751 in next 20 years. Now let’s deduct the premiums paid for term plan and let’s see how much I will be having after 201 years, i.e. Rs. 11,23,751 – Rs 1,56,120 = Rs 9,67,631. You can look for any PPF online calculator to find out the return on investment.
I think Rs 9,67,631 is much higher from Rs 5,74,080.
Final Take Away / Conclusion
So, it is clear and very interesting that a pure term plan + investment is far better compared to a term insurance plan with return of premium. It’s the psychology of people which is forcing them to think that they will not get their money back rather thinking about the net gain by executing this simple comparison calculation.
This is just a calculation and the data may not be same when you do your own calculation. You should know first what is a term plan and what is the need of insurance in life. Then only you will be able to understand why pure term is always better compared to a term insurance with maturity benefits.