Options in Term Plan

"If you want to protect your family’s financial future, it has to be through term insurance."

This is what we read in Personal Finance section of all the newspapers and financial planning websites.

Yes we agree, it is TERM insurance which really takes care of your insurance or protection requirement.

But it does not end there, there are other things which you should consider while buying a Term plan. Namely, what type of premium option should you choose?

Term Plan with a Regular Premium policy.

OR

Term Plan with Single Premium.

OR

Term Plan with Return of Premium policy.

In order to determine which is the best option for you, we will consider a Term Plan with all the 3 options for an individual.

Term Plan with Regular Premium Vs Term Plan with Single Premium

Name Mr. ABC
Age 35 years
Sum Assured 10 lakhs
Term of policy 20 years

Term Plan with Regular Premium Vs Term Plan with Single Premium
Policy Type Term Plan Term Plan
Premium Mode Yearly Single
Premium 4,103 41,318
Total Premium Paid in 20 years 82,060 41,318
Maturity Benefit - -
Notional Return on policy. 0.00% 8.81%
If you see the above table then you can definitely figure out that in case of Single Premium Term plan, outflow of premium is approx. 50% of Term Plan with regular premium, even though the Sum Assured of Rs. 10 lakhs is same in both the cases.

Actually this is the discounted price or present value of Rs. 4,103 payable for next 20 years at the rate of 8.81% p.a.

Simply it means that if insurance company invests Rs. 41,318 at the rate of 8.81% for next 20 years they will get Rs. 4,103 every year for next 20 years.

The main disadvatage in single premium policy is that you are paying all the future premiums in 1 installment. It implies if something happens to the life assured in 5th year (assumed) of policy then his family will get the sum assured in both the regular and single premium policies, but in case of regular premiums he has paid only 5 installments of Rs. 4,103 i.e. total of Rs. 20,515 while in single premium he has paid Rs. 41,318.

Term Plan with Regular Premium Vs Term Plan with Return of Premium

Name Mr. ABC
Age 35 years
Sum Assured 10 lakhs
Term of policy 20 years

Term Plan with Regular Premium Vs Term Plan with Return of Premium
Policy Type Term Plan Term Plan with Return of Premium
Premium Mode Yearly Yearly
Premium 4,103 10,700
Total Premium Paid in 20 years 82,060 214,000
Maturity Benefit - 214,000
Return on policy. 0.00% 4.41%
In the above table you can clearly see that Term Plan with regular premium has less than half the premium of Term plan with Return of Premium, but in case of return of premium you will get a maturity amount of Rs. 2,14,000 which you are not getting in case of regular premium.

The maturity benefit you get in return of premium policy is actually the premiums paid by you in the last 20 years (Rs. 10,700 * 20).

Insurance companies just to return your premiums paid over 20 years are charging you extra of Rs. 6,597 (Rs. 10,700 – Rs. 4,103). It means they are actually not returning your premium.

They are charging you Rs. 4,103 for insurance insurance cover and additional Rs. 6,597 for providing you Rs. 2,14,000 at maturity. If you calculate the return on extra amount of Rs. 6,597 charged by insurance company is just 4.41% over a period of 20 years which is infact less than FD rate which a bank will give you.

So, financially, if you were to instead just pay Rs. 4,103 as premium, and invest the remaining additional premium (Rs. 6,597) into any safe debt instrument, you would earn a higher return than simply getting your money back grown at 4.41% p.a.

As you can see in the above numerical examples, a straight forward Term Plan is far and away the most financially prudent decision you can make, instead of opting for a Return of Premium policy. Where it comes to a single premium policy, this is beneficial in case of life assured surviving the whole term of the policy, otherwise it might not be useful at all.

So remember, when taking insurance, be sure to take enough term insurance to adequately protect your dependents, and avoid the Return of Premium policy.

Buying a Term plan for securing your family’s financial future is a good strategy but buying the best option amongst the Term Plan is the best way for you.