Insurance is not for returns

Return-of-premium plans are more expensive than pure-term plans and have a lower maturity amount than traditional products

"Kitna deti hai?" was the tag line for an advertisement for Maruti cars. While this referred to the mileage, this is the question uppermost in the minds of people buying insurance products in India, even today. We still don't feel the need for an insurance offering only life cover. Due to this attitude, insurance agents often try to sell products offering some savings, but not always suiting customers' needs. Agents do this for the high commissions and to achieve company targets.

"However, after products like the term plan with return of premium (RoP), chances of agents having to mis-sell a product become slim, because agents have a product that customers are willing to buy," says Ashvin Parekh, partner- Ernst & young.

Such products cater to the needs of a segment of people who expect something in return on maturity of their policy. Unlike a term-plan that doesn't give anything on maturity, RoP term plans give you back all the premiums paid. Aegon Religare and Aviva Life insurance were among the recent ones to launch a term plan with RoP. While it functions like any normal term plan, the RoP feature comes as an added advantage. Term with return of premium (TROP) plans, on an average, are two to four times more expensive than a term plan offered by the same insurer, depending on the sum assured and age.

To get an Aviva RoP term plan product, a 30-year-old male (sum assured of Rs 20 lakh) will have to shell out Rs 14,072, against a mere Rs 4,242 for its pure term plan. Similarly, for a sum assured of Rs 30 lakh with a policy tenure of 20 years, one can get ICICI's iCare (online term plan) for Rs 4,753 whereas for RoP (online), one will have to shell out an annual premium which can be as high as Rs 30,799. One has to pay a higher premium for any savings product under the insurance umbrella. Similarly, the premium for RoP term plan is used partly for risk (mortality) cover and the remaining for savings (investment).

Many insurers have plans that only give back the premium, whereas some give it back with interest. One needs to check how much interest the product is promising. For instance, Aviva's RoP plan gives premium plus interest, whereas HDFC Life's RoP product only gives back the premium. Hence, insurers that return only the premiums could charge a high premium.

The part of the premium is invested in RoP term plans is able to give the returns for the RoP feature to work. "Premiums are high and insurers having limitations on investing can generate an average of seven to eight per cent. These returns may not be sufficient for the insured," says Suresh Sadagopan, founder of Ladder7 Financial Advisory Services. Financial planners suggest one should not complicate one's investments. Hence, it is best to go for a pure protection plan and invest the balance in financial instruments suiting one's requirements. For instance, if you invest Rs 3 lakh for 20 years in a bank fixed deposit giving eight per cent annual return, you will get Rs 14.35 lakh after 20 years. This proposition sounds more lucrative and beneficial than just getting your premium paid back. While paying premium for an RoP plan may give you mental satisfaction, this may not be profitable in future.

To make the product look more attractive, some agents might try to sell this product like an endowment plan. However, Sanjay Tripathy, head of marketing at HDFC Life, cautions that endowment products' maturity amount consists of the sum assured plus bonus, whereas the RoP plans only return the premium with interest. Hence, the maturity amount will be smaller compared to any other traditional plans.

The surrender value rules, which apply to traditional plans also apply to RoP term plan. Just that in some cases it includes first-year premium; in some others, it doesn't. For instance, on an average, most insurers offer a 30 per cent guaranteed surrender value (GSV) if you stop paying premiums from the third year onwards. However, one needs to check if the insurer is offering this GSV, including the first-year premium or not. Reason: IDBI Federal's RoP plan offers 30 per cent GSV, including first-year premium, whereas Metlife's RoP plan offers it excluding the first-year premium.

According to experts, getting a loan on this policy is difficult due to its low surrender value, compared to endowment and money back. Reason: only the premiums paid are returned, while endowment and money back include the sum assured and not just the premiums paid.