Why You Should Not Buy Term Plan With Return of Premiums – Explained
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 straightforward 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.
What is the goal of this comparison between Term Plan VS Term Plan with Return of Premium?
Well, I will use few online calculators and try to explain with simple calculation, why one should go for a pure term insurance policy. In fact a term insurance plan with a simple investment can easily beat the term plan with return of premium. I have used below calculators to compile this calculation and prepare this article.
- HDFC Click 2 Protect Plus Calculator – Click Here
- Aegon Life iReturn Term Plan Calculator – Click Here
- ICICI Bank PPF Calculator Online = Click Here
Disclaimer: Don’t consider this calculators 100% correct accurate as they are using indicative data only. Consider this calculations to understand the purpose or the motive of this article using this values.
Data of Insurer Considered as Follows
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]
Term Plan With Return of Premium Comparison with Pure Term Plan
I have simplified the calculation in the below chart which you can understand clearly. In you are not able to follow, then you can read the details below also, I have explained how I have come to this conclusion that it is always good to buy a pure term insurance plan compared to a term plan with return of premium.
Note: All the data is prepared using the above mentioned calculators. These premiums are included the service tax charges.
From this chart let’s understand a basic point first:
Amount lost in case of term plan after 20 years in case the policyholder survive is Rs 2,00,720, but amount repaid back in case of Term plan with ROP = Rs 5,16,680, which is nothing but the premium paid in last 20 years with adding any interest or bonus. This looks simple, but let’s make it little complicated and find out what is the catch behind this simple understanding.
Calculation for HDFC Life Click 2 Protect Plus – Pure Term Insurance
Now if we use hdfc click to protect plus premium calculator, the premium for this data will be around Rs 10,036 considering the life cover option.
So, in next 20 year you are going to pay Rs 10,036 X 20 = 2,00,720. 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 in 20 years= Rs 2,00,720
Calculation for Aegon Life iReturn Plan – Term Plan With Return of Premium
To do the calculation for such policy, I will consider a similar premium return plan from Aegon Life, 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 25,834.
That means in next 20 years you are going to pay = Rs 25,834 X 20 = Rs 5,16,680.
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 and the gap in your understanding.
Who is the Winner !!! 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 paying every year = 25834 – 10036 = Rs 15,798 / 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 become in 20 year. I am not considering the inflation here to find out net benefit or gain, as it’s not required here.
So, debt instrument like PPF 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 15,798 / year will become Rs. 8,49,506 in next 20 years. Now let’s deduct the premiums paid for the pure term plan and let’s see how much you will have after 20 years, i.e. Rs. 8,49,506 – Rs 5,16,680 = Rs 3,32,826. You can look for any PPF online calculator to find out the return on investment.
So, the winner is Pure Term Plan + PPF Account
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.
You can increase the return from your investment in case you opt for mutual funds compared to PPF account. Investing in mutual fund for next 20 years will definitely create a better wealth compared to PPF return considering the positive side of mutual fund investment. In fact if you opt for debt mutual funds with low risk, then also the return will be better. But anyway, investment should be driven by your risk appetite and your financial goal.
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 a pure term plan is always better compared to a term insurance with maturity benefits.
Share your thoughts or experience or any kind of correction required in this article by writing a simple comment below. The calculation may be wrong some way, but I am sure I am able to explain my motivation behind explaining this comparison between pure term plan & a term plan with return of premiums.