Recently I came across one return of premium (ROP) plan. My first thought was – let’s try it out!
Typically, there are three things that you need to choose from in any insurance policy: the monthly benefit, policy term and the choice of plan.
Monthly benefit: You can opt for monthly payment of Rs.10,000, Rs.25,000, Rs.50,000, Rs.75,000 or Rs.1 lakh. This is kind of “configuration” for your nominees and no benefit to you.
Policy Term: There are pre-defined policy terms to choose from and depending upon your choice, the duration of death benefit is spelt out. So, if you opt for a 10-year policy term, the monthly benefit upon your death to your nominee or beneficiary will be for a defined period (say, 20 years).
Choice of Plan: You can either opt for a pure term policy that doesn’t pay anything back if you survive the policy term, or opt for a return of premium plan that will pay 110% of the premium paid by you on surviving the policy term. Of course, the second option is more expensive since it guarantees money back at the end of the policy term.
How it works?
Suppose a 35-year-old male buys this plan for a policy term of 20 years and opts for a monthly payment of Rs.1 lakh for 10 years, or a total of Rs.1.2 crore, as death benefit.
The insurer reports the sum assured in present value terms by discounting it; so, in this case the illustration shows the sum assured to be Rs.91 lakh, and the policyholder will have to pay an annual premium of Rs.17,775. If he opts for the return of premium option, the premium will go up to Rs.48,854.
Return of Premium (in %)
The return of premium option is more than twice the price of a pure term plan, because it guarantees money back on survival. There is, however, little merit in paying such high premiums to get that money back several years later.
|Yr 1||-33635||Yr 7||-33635||Yr 13||-33635||Yr 19||-33635|
|Yr 2||-33635||Yr 8||-33635||Yr 14||-33635||Yr 20||-33635|
|Yr 3||-33635||Yr 9||-33635||Yr 15||-33635||Yr 21||739970|
|Yr 4||-33635||Yr 10||-33635||Yr 16||-33635|
|Yr 5||-33635||Yr 11||-33635||Yr 17||-33635||IRR||0.90%|
|Yr 6||-33635||Yr 12||-33635||Yr 18||-33635|
The rate of return on the premium paid and received at the end of term for a 20 years is 0.50% for 35 years old and 0.90% for 30 years old.
My recommendations – NO BUY*
I believe insurance plan should be only picked up on the protection it offers. For any individual and dependents, insurance products offer protection from loss of income due to death or critical illness. One should not expect any returns from insurance products as the purpose of insurance companies are never to generate good returns and are guided by regulations from IRDA.
There are many products designed to appeal non-savvy non-financial residents and marketed differently. But, I term all these as “mis-selling” and suggest all my readers to apply financial concepts like IRR, Compounding and assess their risks beforehand.
One can easily pick up term plans (with no return expectation) and pay monthly/half-yearly/yearly premiums till age 60. ROP plans are expensive 2-3 times and cannot generate good returns. Better invest in MFs or other non-insurance based financial products.