Shouldn’t I Invest In An Insurance That Returns My Premium?
There are Term Insurance options for ‘return of premium’, should you choose that?
NO!
Well, that was easy 🙂
But seriously, let us get a little deeper into this one.
I have actually had this conversation with people. I will not pretend to understand the emotion behind this thinking. But I recognise that it exists. In this post, we will try to let data answer the question.
To keep things simple, we will look at an online source for quotes. I looked at www.policybazaar.com.
According to Policy Bazaar, 1/4th of the people on their platform chose the ‘return of premium’ option.
Diving right in
Test case: a non-smoking 40-year-old. 1 Cr life cover. Premium payable annually.
I will narrow this to the top 2 quotes on that site.
For the plain vanilla Term Insurance – we get ICICI Prudential and HDFC Life as the winners.
ICIC Pru: 37.7K
HDFC Life: 38.9K
If I check the box for ‘plans that return my premium’ – I get quotes of
ICICI Pru: 48.2K
HDFC Life: 70.5K
Why the huge difference for the ‘premium return’ option.
Well, this bears a little more looksee.
Both of them have very different policy details.
HDFC says – if you survive till age 80 then you get 26 lacs back.
Whereas
ICICI Pru says if you survive till age 70, you get back 12.5 lacs.
Let’s run some numbers
Here is what I am looking at.
Firstly, the difference in premium across the two options.
The two policies have assumed different end dates. This will make it a little ‘apples to oranges’ comparison. I guess the principle still holds across both.
In the case of HDFC:
Premium paid till age 80
Plain Vanilla: 15.3 lacs
Premium Return Option: 28.2 lacs
The money you get back if you haven’t kicked the bucket by age 80 is 26 lacs.
Similarly ICIC Pru:
Premium paid till age 70 (note this is 10 years less)
Plain Vanilla: 10.9 lacs
Premium Return Option: 14 lacs
The money you get back if you aren’t pushing daisies by age 70 is 12.5 lacs.
Well, that in itself should convince you about the futility of buying a premium return policy.
Taking this further
What happens if you invest the difference, say in a debt fund.
Assuming a straight 5% return on the debt fund (neither too aggressive nor too conservative).
HDFC Life equation:
Annual difference in Premium: 32,138
Invested amount at 80 years: 38.8 lacs
ICICI Pru equation:
Annual difference in Premium: 10,542
Invested amount at 70 years: 6.5 lacs
This one was surprising to me. Prima facie it looks like it might make sense to buy the I-Pru money back Term Insurance. But only with a super-conservative investment return lens.
Very likely ICICI Pru has assumed returns of higher than 9% on your insurance premium.
I would of course recommend investing the difference in an Index fund, the historic returns have been upwards of 10%.
I cannot find any supporting arguments in favour of buying a ‘return of premium’ Term Insurance.
Taking a step back
Why do we need insurance?
I do have a separate post on this very topic.
We buy insurance so our family can continue to enjoy the same lifestyle in our absence, that they would have if we were around.
Therefore, my sense is to always keep it simple and go for the absolute plain vanilla option.
The thing with looking at a ‘premium return’ quote is the monthly/ annual premium amount is much larger.
If the larger premium prevents you from taking sufficient insurance cover, that is a bad outcome.
The worst thing you could do for your family is, buy lesser insurance than you need.
You need to take adequate cover and there is no compromising on that front.
Insurance is only insurance. Nothing else.
It is not an investment, do not look at returns here.
It is important to keep the distinction between insurance and investment. They serve different purposes.
For investments get anal about returns, do not accept returns lower than index. But don’t hold back on insurance. It is the safety net for your family.
The thing to remember is, you only need insurance till you have dependents.
Once your kids have moved on, you and your spouse can reassess your insurance needs. Most of us will not need insurance beyond 65 years of age.
In summary, I would still come down in favour of the plain vanilla term insurance to protect your family.
Any additional funds available should be invested. This will provide further funds for your family in the worst case.
Key takeaways:
- Insurance companies charge you a much more hefty premium when you look for ‘return of premium’ policies
- You cannot let your family down and buy lesser insurance than what you need
- Buy as much insurance as you will need to ensure your family has a comfortable life. At a minimum they need to maintain their current lifestyle.
- If there is surplus then invest it according to your risk appetite
- Insurance is not investment it is just insurance, don’t confuse the two.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.
