Should you buy term plans with return of premium?

It refuses to amaze me how the insurance industry will try to complicate a simple product like a term plan. As Indians are not ready to pay for insurance and still view it is an investment, insurance companies have manufactured a product that comes with a return of premium at the end of the tenure? Isn’t this wonderful? So should one go for such plans? Lets do some simple math to find out:

I had a look at Aegon Religare’s return of premium plan for a 30 year old non smoker male for a sum assured of 1 crore. The premium comes around 23,000 per annum and the coverage is only available till 50 years. Compare this to a normal online term plan which will cost around 8000 for 30-35 years.

Now lets compare the so called “returns” of these 2 options:

In return of premium plan, you’d invest 23000 every year and get back your 4.6 lakhs at the end of year 20. One of biggest drawbacks is that you are not covered in your 50’s !

In the normal term plan, you’d pay 8000 and get 0% return on the same.Assume that you manage to get about 7% on the remaining 15000/annum for the next 20 years. So what do you get here. A back of envelop calculation shows that you’d get around 660,000 after 20 years! That gives you a saving of about 2 lakhs plus you get covered till 70!

Now most of the people can’t do this calculation and fall into the trap of “securing their money” and insurers are happy to give them such fancy products.

Our recommendation is always to go with simple term plan. Put rest of your money into good investment products that can get you 8-12% returns!

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