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Avoid term plans that offer to return your premiums

by Staff Reporter
25 Sep 2019 at 19:04hrs | Views
Insurance is something we all need to have. You can rest easy knowing our loved ones will be financially secured should something unfortunate happen to you. Term Insurance is one of the best forms of insurance in the market today. For those who may not know, it is an insurance scheme, where you pay a relatively smaller premium for insurance coverage over a limited coverage period. Should you survive that time period, the insurance becomes void.

What Is Return of Premium Term Plan?

Life insurance is a good safety net to have, but people are reluctant to put their money into something that gives no returns on maturity. They want more than just that safeguard in place. This reluctance on their part has enabled insurance companies to come up with new alterations in the term plans. The latest such version of term insurance is called return of premium term plan.

As you may have gathered from the name, it is a term insurance where you get the premium amount back if you survive through the term period. It sounds pretty good when you first hear it right? You get the protection during the term period; and should you survive, you get your money back too. Looks like a win-win situation at first glance.

The premium amount for the return of premium term plan is significantly higher than a simple term plan. But this does not concern most people since they know they are getting the amount back if they survive the term period.

Why You Should Avoid Return of Premium Insurance.

While this type of a term plan may break even eventually, it is not a good idea. Experts advise people to avoid this kind of insurance as it erases all potential of making your money grow. To help you understand better, let us take a look at the following example on how you can fare better by avoiding this type of term plan.

Consider a simple term insurance and a return of premium term insurance for a time period of 30 years;

Premium of simple term insurance

INR 8,500

Premium of return of premium insurance

INR 22,500

So over 30 years, you pay a total amount of INR 2.55 lakh for a simple insurance term plan; while, for a return of premium plan, you pay a total amount of INR 6.75 lakh. The difference between the two amounts is huge; but people will say better to pay higher amount that you will get back rather than a smaller amount you might never see again. But hold on, let’s dig deeper.

Now, since a simple insurance plan will give you back no survival benefits, you will get nothing back in 20 years’ time. On the other hand, the return of premium plan will pay you back the INR 6.75 lakh you paid over 30 years. SO why is it not a good idea?

Suppose you take a simple insurance plan instead of a return of premium plan; the difference between the two premiums is INR 14,000 annually. Now if you take that Rs. 14,000 and invest it in something for 30 years, you will get good returns on it.

Here are some of the possible returns you will get on different investments:

Savings Account at 4% returns per annum

Rs. 8.25 lakh

Liquid Fund at 6% returns per annum

Rs. 12 lakh

Public Provident Fund at 7.9% returns per annum

Rs. 17.5 lakh

Balanced Fund at 10% returns per annum

Rs. 27 lakh

Equity Fund at 12% returns per annum

Rs. 40 lakh

As you can see, the returns you can gain by investing the extra Rs. 14,000 are huge over 30 years of time.

Make Your Money Work and Grow!

If you opt for the return premium plan, you will get the same amount back in 30 years’ time. This does not add up to much over 30 years. However, if you go for the simple term plan, you might lose the Rs. 2.55 lakh, but you can invest the remaining Rs. 14,000 and get huge returns over 30 years.

Consider the investment with the lowest percentage of returns. Putting the INR 14,000 every year in a savings account in a bank will grow that money to INR 8.25 lakh over 30 years. This is already Rs. 1.5 lakh more you get than the premium return plan.

For the best case scenario, let’s consider the returns from an equity fund at 12%. The total amount you will get after 30 years of investing INR 14,000 per year will be Rs. 40 lakh. That makes for an astonishing difference of Rs. 33.25 lakh!

This is a staggering amount of wealth created over 30 years compared to just letting it sit. The insurance companies will make their profits. They will invest the high premiums you pay for return premium plans, and earn their exorbitant profits for themselves. Hence, they have no issues when it comes to paying you the principal amount back after 30 years. But you get the exact same amount after 30 years without any of the growth.

The insurance companies will entice you with terms like “free insurance.” While it is not incorrect, it gives you absolutely no returns. The Rs. 6.75 lakh is not as valuable at the time of maturity as it was 30 years before.

This might be the safest and most risk-free way of going about it. But it is detrimental to your financial goals in the long term. It is best to avoid such term plans. It makes much more sense if you opt for a simple term insurance plan. This way, you can have the same amount of insurance coverage as the return of premium plan. On top of that coverage, you can invest the extra money you save on premium and invest it. This will grow your money every year, leaving you with nice and hefty returns on your investment.

Source - Byo24News