Insurance: Seek cover, not money

When asked about his investment, 41-year old Rajesh Tripathi is quick to refer to Life Insurance Corporation’s endowment and moneyback policies. Asked about insurance for his life, his response does not change. Prod further, he promptly says, “These plans (endowment/ moneyback) are better, they give some returns. Pure life insurance is just a waste of money.” Tripathi is not alone. Many insure themselves only through investment-cum-insurance plans. However, there is another option that not many may be aware of - term plans with return of premium. This is a standalone traditional insurance policy. The good part: A term plan with return of premium would return the money you pay through the policy term. “It is a non-participating term plan that promises to pay back the sum of all the premiums, or a certain percentage of the premiums, paid by the policyholder during the policy term, at maturity. However, in case of a loss of the life assured, only the sum assured is paid,” says Rituraj Bhattacharjee, head (market management), Bajaj Allianz Life Insurance. For instance, if one buys a return of premium cover and opts for a sum assured of Rs 10 lakh for 20 years, the amount payable at the time of maturity would be calculated as 20 times the annual premium. However, in case of an untimely demise during the policy term, the nominee would get only the sum assured, Bhattacharjee said. There are policies that pay just the sum total of premiums, even if one survives the policy term. Sunil Sharma, chairman (advisory group), the Institute of Actuaries, says, “And, this will be less than the sum assured.” In comparison, a term plan is the simplest form of insurance and does not pay back if one survives the policy term. The premium you pay is considered the pure cost. Only if the policyholder passes away during the policy term does his/her family get the sum assured. Importantly, if a policy returns your money on maturity, it will definitely charge you for it. Therefore, a return of premium plan is expensive, as opposed to a term plan. A pure life cover, because of its nature, is more economic than a return-of-premium plan for the same sum assured. A term plan would charge premium of Rs 2,000-2,500 annually for a cover of Rs 15-lakh for 20 years for someone in the age bracket of 30-35 years. A similar cover for the same person through a term plan that returns premiums would charge around Rs 10,000-11,000 annually. Sample this: You buy a term plan with return of premium charging Rs 10,000 a year for 20 years. If you survive the term, you would get back at least Rs 2 lakh. However, if you buy a pure term cover and invest the balance (the difference between premiums of the term plan and return of premium plan) in equity diversified mutual funds, you can earn much more. In this case, if Rs 8,000 is invested in mutual funds for 20 years, the maturity amount would be over Rs 5 lakh (assuming 10 per cent annual returns every year). Obviously, markets would not return 10 per cent year after year. But then too, the returns would be much more than the assured sum of Rs 2 lakh. In the last year, equity diversified funds lost 11.50 per cent, owing to the poor market conditions. Historically, equity, as an asset class, returns between 10-12 per cent a year. At the same time, investing the difference in fixed deposits would also help one earn decent returns --- between nine and 9.50 per cent a year. Sharma says, “But, there are some customers who look for tangible benefits, and a return of premium plan is for such individuals. At the same time, if one is only looking for life cover, a term plan is recommended and it is much cheaper.” Like a term plan, return-of-premium plans offer benefits in form of riders or built-in features such as accidental death, critical illness, hospital cash, waiver of premium and accidental permanent total/partial disability.