Do the math before picking these policies that cost 2-3 times more

 

There are no free lunches. Yet, words like free, discount or a cash-back offer never fail to excite the gullible consumer. It becomes easier to fool them if the general awareness level is low. Premium back insurance plans are the textbook example of this.

The proposition is simple--it is a term plan, which pays in case of death of the insured but returns the full premium if the policyholder survives the policy term. Sounds like free insurance, right? A perfect trap for the policyholder who always thought paying premium for a pure insurance product was a waste.

Though these plans cost 2-3 times more than a regular term plan, there are takers. Many customers expect some sort of return from life insurance policies, at least the capital. Since these products click with many , insurers like PnB Metlife also have a critical illness version of premium-back plans.

A term policy for a 30-year-old that covers him for `1 crore for a tenure of 25 years will cost around `10,000. On the other hand, the term return of premium (TRoP) version of the same plan would cost `30,000. `20,000 more every year for 25 years. Is it wise?

Well, here is the simple math. Instead of paying the insurer, if you had put that `20,000 every year in a fixed deposit (FD) that earned an 8% return, you would have Rs 15.79 lakh at the end of 25 years. The insurer on the other hand is going to pay back `7.5 lakh if it's a 100% return-of-premium plan.Different plans offer different return -of-premium policies. For instance, while some plans do not pay back the first year premium, others like PnB MetLife and Aviva Life's return of premium plan gives an additional 10% of total premium paid, Birla Sun Life pays 100-125% of premiums paid, depending on the product variant you choose. In case you had bought the 125% TRoP , you would still get back only `9.37 lakh, which is `6.4 lakh less than what an FD could have accumulated.

Apart from death, some of these plans also cover critical illness or have a built-in personal accident cover. Even if you consider the price of these additional covers, the product is still overpriced. A `10 lakh critical illness plan for a 35-year old costs `4,500 yearly .

Also, these plans can be quite complicated to understand. Some of the TRoP have fancy short-term premium payment options wherein you get protection for 20-30 years but pay premiums for only If additional premium paid is put in an FD that earns 8%, the money would grow ti `15.79, a difference of `7.54 lakhs. If you invest in an equity MF plan that gets around 12% return, you'll accumulate a corpus of `29.86 lakh, a difference of `21.61 lakh. 10-11 years. This is an even bigger ripoff as you are paying a higher premium during the initial term.

A lakh invested over 10 years will have a higher compounded interest than it being spread over 20 years.Meaning, you are foregoing a larger interest if you pick the short-tenure premium payment option.

The only advantage TRoP plans have over regular term plans is that they come with a `paid-up' option. So, if you default on premium payments or stop paying altogether, the policy continues, but with reduced benefits.

While the premium paid will be returned at maturity , the nominee will get a reduced sum assured if the insured dies