Recently a banker named Sudhanshu age 30 asked me which term insurance he should purchase. To that I insisted him to go for the one with better claim settlement ratio etc. Generally I suggest people to go for one with the least premium amount. The most important thing to be kept in mind while selecting a Term Insurance is to declare everything. Don’t try to hide any illness or any personal habits such as drinking or smoking. Have a look at my article on How To Select a Term Plan.
As he was going to purchase the term plan via online mode, he encountered a plan named “Return of premium plan”. This plan says that it will return the premium amount paid if nothing happens to the insured person at the end of the term. Now this sounded good to Sudhanshu and he enquired me again.
To this I did some numbers to see whether to go for a “pure term insurance plan” or “return of premium term plan”.
POLICY: HDFC TERM INSURANCE
Case 1: Sudhanshu pays Rs.11,001 per annum as premium for 35 years (30-65 years). In total he pays Rs.3,85,035 as premium. Nothing happens to him during this tenure. On completion of policy term, he gets nothing. This is what a pure term plan does. On the other hand if he dies during this tenure (30-65 years), his nominee will get a sum assured of Rs.1 crore with immediate effect.
Case 2: Sudhanshu pays Rs.24,426 per annum as premium for 35 years (30-65 years). In total he pays Rs.8,54,910 as premium. Nothing happens to him during this tenure. On completion of policy term, he gets Rs.8,18,000. On the other hand if he dies during this tenure (30-65 years), his nominee will get a sum assured of Rs.1 crore with immediate effect.
|POLICY NAME||HDFC 3D PURE TERM||HDFC 3D RETURN OF PREMIUM|
|SUM ASSURED||1 CRORE||1 CRORE|
|POLICY TERM||35 YEARS||35 YEARS|
|PREMIUM PAYING TERM||35 YEARS||35 YEARS|
|TOTAL AMOUNT PAID IN 35 YEARS||385035||854910|
|AMOUNT REFUNDABLE AFTER POLICY TERM||NIL||8.18 LAKHS|
My Take: Total Amount of premium paid in case 1 is Rs.3,85,035 whereas Total Amount of premium paid in case 2 is Rs.8,54,910. Clearly a difference of Rs.4,69,875 in 35 years or Rs.13,425 per annum.
If Sudhanshu is tempted that in case 2 he will get back the premium paid than he will not be tempted anymore after seeing this simple 2 step calculation:
Step 1: Go for case 1, wherein he pays Rs.11,001 per annum.
Step 2: Invest Rs.13,425 per annum in Mutual Funds. Rs.13,425 is the difference between case 1 & case 2 amount.
This is what will be accumulated at the end of 35 years:
@12 % rate of interest Rs.13,425 invested per annum for 35 years will become Rs 65 lakhs
@15 % rate of interest Rs.13,425 invested per annum for 35 years will become Rs 1.36 crores
@18 % rate of interest Rs.13,425 invested per annum for 35 years will become Rs 2.87 crores
Whereas in return of premium term policy, Sudhanshu will be getting only Rs 8.18 lakhs.
GO FOR A PURE TERM PLAN. STAY AWAY FROM MARKETING GIMMICKS.