Viewpoint | Avoid term insurance plans that offer to return your premiums

On the face of it, the plan appears to be a great option. You get a term plan and also get back the premiums if you survive. What more could you have asked for?

Plan details

Insurance companies are here to do profitable business and that is what they do with Return of Premium Plans as well. This would become clear with a simple example that we shall take up shortly. But before that, make note of the following:

- In case of death, both simple Term and Return-of-Premium Term Plans pay the same amount.

- In case of survival (or maturity), the simple Term Plan pays nothing. But the Return-of-Premium plan gives back all the premiums you paid over the years.

- Most importantly, the premium for Return-of-Premium plan is different from that of the simple term plan.

Suppose you are a 35-year-old, non-smoking male from Delhi, who wants to buy a Term Plan of Rs 1 crore coverage and 30-year tenure.

The premiums for both plans on HDFC Life’s website are as follows:

- Simple Term Plan − Rs 11,450 + taxes annually for 30 years

- Return-of-Premium Term Plan − Rs 32,580 + taxes annually for 30 years

You cannot deny that the difference in annual premium is significantly large.

Of course, the maturity benefit is different in each case. One returns nothing and the other gives back all the premiums you paid over the past 30 years (i.e. 30 x Rs 32,580 = Rs 9.77 lakh).

At this point, many people start thinking that even though premiums for Return-of-Premium plans are higher, they at least are getting something back on maturity.

But that is not the right way to look at the policy.

Premium play

The difference between the premiums of two policies is Rs 21,130 (calculated as = Rs 32,580 - Rs 11,450).

In a Return-of-Premium plan, by paying Rs 21,130 extra every year (over a simple term plan), you get back Rs 9.8 lakh after 30 years.

So, in a way, a Return-of-Premium Plan is a kind of a hybrid product that takes Rs 32,580 every year from you. Of that, Rs 11,450 is used to provide insurance cover of Rs 1 crore. And the remaining Rs 21,130 is invested (by insurance company) every year so that after 30 years, it becomes Rs 9.8 lakh.

Now, what if you chose the simple term plan (with Rs 11,450 premium) instead and use the Rs 21,130 to invest in PPF (public provident fund) every year. How much would you have saved in 30 years?

The answer is Rs 25.8 lakh!

The difference is staggering—almost Rs 16 lakh more than what you would get back from a Return-of-Premium plan. And we chose a simple basic PPF giving 8 per cent return. Imagine the corpus accumulated if even a part of Rs 21,130 were instead invested in equity funds.

To give you an idea, a 50:50 PPF:Equity Fund allocation would have generated a corpus in excess of Rs 41 lakh (assuming 8 per cent annual average return from PPF and 12 per cent from Equity Funds)!

Let’s summarize:

Many insurance agents will try to fool you by saying that these return of premium plans are basically ‘free insurance’ as they return the premium. But as is clearly evident from our above discussion, it’s best to avoid these Return of Premium Term Plans.

Instead, just purchase a simple term plan and invest the excess difference amount (over the return-of-premium plan) in PPF, equity funds, etc. You will get a much higher amount on maturity than what is being returned to you by Return-of-Premium plans.

(The writer is the founder of StableInvestor.com)