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Do return of premium plans score over term plans?

LiveMint logoLiveMint 18-04-2017 Deepti Bhaskaran

Bharti AXA Life Insurance Co. Ltd has introduced return of premium term insurance plan called Income Protection Plan. In it, on the death of a policyholder, it pays the sum assured in periodic instalments to the nominee and if the policyholder survives the term, it pays up to 120% of all the premiums paid. Here are more details of the plan.

A term insurance policy is a plain vanilla product, which only charges you for insuring your life. This means, you only pay for the cost of insurance. So, if you survive the policy term, you don’t get anything back. And on death of the policyholder during the policy term, the beneficiary gets the sum assured, or the insurance money, and the policy terminates.

On the other hand, a term plan with return of premium returns the premium paid at the end of the policy term, if the policyholder survives the term. On death, as in the case of a term insurance policy, the sum assured is paid to the beneficiary and the policy terminates.

Bharti AXA’s Income Protection Plan is a return of premium term policy in which you can choose among three policy terms: 12 years, 15 years and 20 years.

In terms of insurance benefits, on death of the policyholder, the nominee gets the sum assured. But instead of a lump sum, the payment is broken down into annual instalments and paid over 15 or 20 years. You can choose between the two pay out terms. Also, the beneficiary at the time of receiving the death benefit can choose to take the pay outs as a lump sum.

In terms of the maturity benefits, you could either choose return of premium or return of premium plus a little extra. “Customers can opt for a higher payout on maturity by paying extra premiums,” said Mudit Kumar, chief and appointed actuary, Bharti AXA Life.

So for a policy of 12 years, you can either choose 100% of your money back or 110% of your money back. For a 20-year term you can choose 100% or 120% of the premiums on maturity. As per Kumar, this policy is meant for those who are not comfortable buying a term plan alone and want something back at the end of the policy term.

“The minimum sum assured under this plan is Rs5 lakh. Our target segment is the middle-income group with a premium ticket size of Rs15,000-20,000,” added Kumar.

As per the illustration mentioned in the product brochure, we assume that a 35-year-old male buys this plan for a 20-year term and for a sum assured of Rs25 lakh. In terms of insurance benefits, he then chooses that the instalments be paid over 20 years and in terms of investments he chooses a return of 120% of the premiums paid. In this case, his annual premium will come to Rs28,650.

According to Suresh Sadagopan, a Mumbai-based financial planner, return of premium plans don’t cut much ice. “Looking for premiums back in a term policy means you end up paying a much higher premium compared to what you would pay under a plain vanilla term policy. It’s better to stick to a plain term plan and, if need be, go for a plan that allows you to stagger the death benefit as monthly pay-outs,” he said. Also keep in mind that even though you get the premiums back, you get very little return on investment. As per the illustration above, 120% of your money back translates into a net return of just 2%.

This plan offers staggered periodic payouts on death, which is what many term plans now offer. Added to that is the convenience of getting premiums back on maturity, but if you are in the market for an insurance policy, buy a term plan. You may not get anything back at the end of the term, but you will pay a lot less for the same insurance benefit and you can invest the difference in a better investment product.

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