How can I get guaranteed returns on my term insurance?
If you’ve read our article - Could term insurance be wrong for you? - you’ll know that you don’t need a policy all the time. You only need a cover from the point in life when you have financial dependents, to the point until you’re financially free. Because remember - a pure term plan doesn’t offer a payback just because you keep paying premiums. If you outlive the term - you don’t get anything back.
But what if you’re someone who doesn’t like such a proposition? What if you don’t want to make an investment that doesn’t pay you back? What if you only want a plan that guarantees that you or your family gains something back from your investment?
If this is you - there are two types of plans you might find enticing. Let’s go through these two options in this article and weigh their pros and cons.
Term plans that give you guaranteed returns
1️⃣ Whole Life Insurance (or) Long-term or ultra long-term policies
Long-term and ultra long-term policies are term insurance policies that provide coverage for up to 85 years to 99 years. Some insurers call such 99-year plans ‘whole life covers. As it is unlikely that you'll survive such a long-term, there’s a high probability that your family gets an assured payback when you're gone. Let’s look at an example and understand how these plans work.
Mr. Kapoor buys an ultra-long term insurance policy of 99 years of INR 1 Crore when he's 30 years old. Let's find out how the returns will vary depending on when he passes away.
|Pay type||Yearly premium||Age of death||No. of years paid||Total paid until death||Claim received||% Total return generated|
|Regular||28,176||65 years||36||10,14,336||1 Crore||10.30 %|
|Regular||28,176||85 years||56||15,77,856||1 Crore||5.42 %|
|Limited (10 years)||80,664||70 years||10||8,06,640||1 Crore||7.08 %|
|Limited (10 years)||80,664||99 years||10||8,06,640||1 Crore||3.90 %|
|Limited (30 years)||35,104||86 years||30||10,53,120||1 Crore||5.33 %|
If Mr. Kapoor dies at 65 with a Regular Pay model, the investment could bear an interest of 10.3%.
On the other hand, if he chooses Limited Pay (10 years) and even passes away just before the end of the term, at 99, the total return generated is 3.9%. In the calculation above, this is the minimum he would get - but that too is not a bad return considering a term of 69 years!
Having said that, there are a few drawbacks that you should know about.
Drawbacks of buying Whole life insurance explained
- Premiums for these long-term plans or whole life covers could be considerably more expensive than pure term plans. Especially if you consider the NPV calculations (Net Present Value), you’ll see that you’ll be spending a lot of money towards an otherwise cheap term plan, just to ensure payback.
- You’ll have to pay premiums for a longer period that could go even beyond your retirement. It might not be possible for you to continue payments once your source of income is unavailable.
And finally, even with this policy, if you survive the term and live a wonderful 99 years, your policy will mature and you’ll not receive anything back. (But, we don’t see you complaining about living such a long life! 😉)
So - are there options where you can get some amount back, even if you outlive the policy? That will surely guarantee that your investment didn’t go to waste, right? Here’s a popular option some financial advisors might give you.
2️⃣ TROP (or) Term Plan with Return of Premium
A term plan with return of premium (TROP) is a type of term insurance plan that comes with a maturity benefit. That is - you get some money back at the end of the term even if you survive. Basically - if you outlive the policy term, the insurance company will return all the premiums that you paid over the policy tenure (minus the taxes), at the time of maturity.
For instance, you buy a term insurance policy of INR 1.5 crore for 30 years at a premium of INR 30000 per year, with a return of premium option. Your family would receive INR 1.5 crore in case you pass away during the policy term. However, if you survive the policy term, you will receive INR 9,00,000 - 9 Lakhs (30000 x 30) as a survival benefit (minus the taxes).
In the first instant, this might seem like a fantastic option. You get a cover, and get all your money back too! What do you have to lose, right? But as always - if something seems too good to be true, it probably is! So, you better be wary.
Why is term insurance with a premium return a bad option?
There are two main reasons that stand out.
- One - Compared to pure term insurance plans, the premiums of TROP plans are much higher. So, not everyone can afford TROP plans in the first place. For instance, take this case of a 30-year old, non-smoker taking a Sum Assured of INR 1 Crore (Lump sum payout) up to the age of 65 years.
Here’s the difference in premiums between a pure term plan, and a TROP plan.
|Insurance company||Pure Term Plan Premium||TROP Plan Premium|
- Two - (This is crucial) The premiums you are paying, over the long term of your life are basically returned to you - interest-free. Further, the amount is not even adjusted for inflation. So, if you consider the changing value of money over time, you’ll be in for a rather uncomfortable surprise!
To understand this better, we’ll need to do an NPV calculation (Net Present Value) of all the premiums you pay - over time. Take this example.
Say Mayank, 30 years old, buys a TROP plan for a sum assured of INR 1 crore for a duration of 35 years. Let’s look at the total premium amount he’ll get back if he survives the term and the Net Present Value (NPV) of the amount.
|Annual Premium paid (without tax)||INR 15941|
|Total Premiums paid that will be returned||INR 557935|
|NPV of the Total Premiums paid over 35 years (at a 6% inflation rate)||INR 244984|
Mayank pays INR 5,57,935 which will be paid back (minus the taxes) if he survives the term. But when you calculate the NPV, the actual value of that money is only INR 2,44,984.
As you see, while the insurer promises to return all your premiums, with time the value of those premiums goes down drastically, owing to inflation. And the real value of what you get is only a fraction of your actual investment. On top of that, you lose out on any interest that you could have made, over that money!
So, while both long-term/ whole life plans and TROP plans are packaged as 'get your money back' plans, they technically cost you way more than regular term insurance plans. While you won’t get a decent return for your investment - you could even end up making a loss. And for someone who wants a good bang for their buck - these options are not really aligned with your financial objectives.
So, how should you approach term insurance plans?
- In our opinion, the best approach is to invest in a pure term life plan (which can be extremely cheap) - as an investment-focused entirely on protecting your family from financial ruin, in case of your death. The premiums you pay are to achieve that peace of mind, that your family is taken care of - should something untoward happen to you.
- Second - invest all the additional money you might spend either on a long-term policy or a TROP plan - in a separate investment product. This will ensure that the money actually grows with time and pays you back a meaningful return.
But, before you choose the right term insurance plan for yourself and your family, ensure you compare these plans across insurers.
- In term insurance, there will be no claim payout if you outlive the policy.
- However, if you want to ensure a guaranteed return on the money you invest, there are two types of term plans that are usually recommended - a long-term or whole life cover that ensures a guaranteed paycheck goes to your family, or a TROP plan that gives you a guaranteed payback to you at the end of the term.
- Both these plans have some drawbacks making them bad investments, with poor returns, even causing losses on your investments.
- Instead of putting your money in such plans, you should take a regular term insurance plan, and invest the balance amount in any other investment product and earn better returns.
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