Term Life Insurance: Indian insurance companies know what customers want when it comes to insurance. Most people opt for traditional endowment policies, but some are realising that term life insurance is more beneficial
Term Life Insurance: Insurance companies in India know what customers want when it comes to insurance. Most people go for traditional endowment policies, but some are realizing that term life insurance is more beneficial. Still, some people are lured by the promise of a return of premium by companies selling return-of-premium term plans.
How is it different from a normal term plan?
In both the plans, the same amount is received on the death of the person. The only difference is in the maturity. In a normal term plan, nothing is received, but in a return-of-premium plan, the entire premium paid is returned. Sounds attractive, right? But there is a hidden secret in this. The premium of a return-of-premium plan is higher than that of a normal term plan. This is the reason why it should not be chosen.
Understand with example
Example: A 35-year-old man wants to take a term cover of Rs 1 crore for 30 years. On checking the premium on HDFC Life Insurance’s website, it was found that the annual premium of a normal term plan is Rs 18,934. Whereas, the annual premium of the return-of-premium term plan is Rs 47,712. There is a difference of Rs 28,778 in the premium of both, which is equal to about one and a half years of premium of a normal term plan. In case of an accident, Rs 1 crore is received on both the plans. The only difference is that in the normal term plan, nothing is received on maturity, whereas in the return-of-premium plan, the entire premium deposited (30 x 47,712 = Rs 14.3 lakh) is returned. But note, no interest is given in this.
The difference in the premium of both the policies is Rs 28,778
If you consider that a return-of-premium plan gives you something back on maturity (even if the premium is higher), the difference in premiums for the two policies is Rs 28,778 (Rs 47,712 – Rs 18,934). Now, what if instead of taking a return-of-premium plan, one takes a normal term plan (which has an annual premium of Rs 18,934) and invests the remaining premium (Rs 28,778) every year for 30 years? If the return is 7% to 10%, the amount of regular investment over 30 years can be between Rs 29 lakh and Rs 52 lakh. Compare this with a plan where a return-of-premium plan only returns the premium deposited (Rs 14.3 lakh) and does not earn any interest on it.
Now you must have understood why one should not buy a return-of-premium plan. It is better to buy a normal term plan and invest the remaining premium (more than the premium of the return-of-premium plan) in PPF, equity funds, etc. This will give you more money on maturity than the return given by the company.
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