look news india
Term Life Insurance: Insurance is as important as investment and savings for the purpose of protecting the family from financial difficulty in case of accidental events and death. It protects against unexpected disaster. But if some things are not taken care of while choosing insurance, then the person may be deprived of its benefits.
While most people take traditional insurance policies, some savvy people have now turned to term life insurance. But you can also choose from different types of plans. One is the normal term plan and the other is the return-of-premium term plan.
Regular term plans vs return-of-premium term plans
Both life insurance plans provide a fixed amount on the death of the individual. The only difference is the maturity date. In a normal term plan, policyholders do not get any compensation or return of capital at the end of maturity. While in a return of premium plan, the premium deposited is returned, which is attractive. But the harsh reality is that the premium of return-of-premium plans is more than double that of normal term plans.
Understand the difference between the two plans like this
Suppose a 35-year-old man invests Rs. 1 crore and wants to buy a term cover. As per the premiums on the HDFC Life Insurance website, the annual premium for a normal term plan is Rs. 18,934. Whereas, the annual premium of a return-of-premium term plan is Rs. 47,712. The difference in premiums between the two is Rs. 28,778, which is equivalent to about one and a half years of premium for a normal term plan. In case of accidental death, both plans offer a compensation of Rs 1 crore. However, in a normal term plan nothing is returned after maturity of 30 years, while in a return-of-premium plan the entire premium deposited (30 x 47,712 = Rs 14.3 lakh) is returned. Notably, no interest is earned.
Losing returns by paying higher premiums
After reading the above article, most people will opt for the return-of-premium plan where we get our capital back at the end of maturity. But do you know how much you can save? ₹28,778 (₹47,712 – ₹18,934) more will have to be paid.
You can cover the premium by investing the remaining amount
Now, what if instead of taking a return-of-premium plan, one takes a normal term plan (which has an annual premium of Rs 18,934) and invests the remaining premium (Rs 28,778) every year for 30 years? You can get an average return of 7% to 10%. At the end of 30 years of regular investment, along with the returns, you can create a total corpus of an estimated Rs. 29 lakh to Rs. 52 lakh, which is many times more than your total premium of a normal term plan of Rs. 568020 and the amount of return of premium (Rs 14.3 lakh).
Now you must have understood whether you should choose a return-of-premium plan while buying life insurance or a normal term plan and invest the remaining premium in PPF, equity funds, etc.
