The lure of 'return of premium' policies

The advent of private sector life insurance companies has resulted in a surge in the number of life insurance products available in the market. Expectedly, this has led to more indecisiveness as comparing policies is becoming more difficult. One such area where there is a need for clarity is the term insurance products.

A term insurance policy, broadly speaking, refers to a product which offers only pure risk cover i.e. there are no maturity benefits. Presently however there are hybrid term insurance plans available, which also offer the benefit of 'return of premium' in case the life assured were to live through the tenure of the policy.

So should one go in for a pure term plan or a term plan which offers a 'return of premium' add-on? Below we attempt to answer this.

Let's take the example of a healthy male of age 39 who would like to cover himself for an amount of Rs 1,000,000 for 20 years. Let's assume there are three companies in the market, A, B and C. While A offers only a pure life cover, companies B and C are offering term policies with 'return of premium' add-ons.

The table below indicates the annual premium for such a policy for the individual. Also mentioned is the total outflow during the tenure of the policy. The assumption here is that the life insured lives through the tenure of the policy.

Name of the Insurer.	Term Assurance Premium [ pa ]	Total Outflow [Rs ]
A	4,740	94,800
B	18,524	370,480
C	21,000	420,000

For the life insured in our example there would be no maturity benefits if he were to take a term insurance policy from company

A. However, if the policy were to be taken either from company B or company C, all the premiums paid during the term of the policy would be returned as maturity benefits.

Prima facie, the return of premium option seems attractive. However, we need to take into account the fact that the premiums paid to company A are much lower as compared to the other options. To bring in some parity in the comparison, suppose the person in consideration, invests the difference in premium (between pure term and 'return of premium term) in, say mutual funds.

Assuming a very conservative return of 5% pa over 20 years, the value of the investments in mutual funds would have grown to:

	Annual Investment [ Rs ]	Maturity Value [ Rs ]	Maturity Value [ Rs ]
		Assuming 5% Return	Assuming 8% Return
Diff B over A	13,784	455,781	630,783
Diff C over A	16,260	537,652	744,090

It is very apparent from the table above that return of premium policies may not be the best option available in the market today. This would hold true even if one were to factor in the capital gains tax that would be incurred on profit earned on the mutual fund investments.

So before you go in for the term policy with the 'return of premium' add on, do the math. You may be better off with a regular term plan.