Imagine a 25 year-old young man who has recently got a job. He realizes that now that he is a source of income for his family, he needs to make sure they are provided for in case of his demise. But after doing some research, he realizes that although they are so cheap term plans do not come with any assured returns. As he is so young, any effective term plan must give him a coverage of at least 45 years. In case of his survival, this huge investment will see no returns.
So he goes for an endowment policy with guaranteed returns, where his life is insured and in case of survival he receives the premium amount+ interest.
This form of insurance policy has become very popular recently, targeting the young conservative investors, who want better returns than regular savings accounts, but do not have enough risk-appetite to go in for market-linked insurance plans. Those who go in for life insurance with maturity benefit, often find it difficult to predict their returns. Unlike bank accounts which have a straight-forward interest system and few deductions, returns-based insurance plans come with a plethora of charges and bonuses.
Here is a step-by-step guide to help you calculate your returns on insurance:
1. Read the Offer Document Carefully.
Read the offer document carefully, and make a note of all the charges and bonuses. Then make a table like this:
|
Year |
Premium |
Charges |
Final amount |
Interest/Bonus |
Balance |
|
|
|
|
|
|
|
Charges are deducted by the bank, the insurance provider or the government. The final amount is your premium after deduction of charges. Interest is applied on this amount. Balance is the amount added to your account at the end of each year.
2. Make Your Calculations.
Charges can differ from year to year. ICICI Pru Savings Suraksha offers 5% of maturity benefit as bonus for the first 5 years. LIC’s Bima Account charges 27.5% of your premium for the first year and 7.5% in the second. Subtract all provider charges and taxes from your yearly premium to arrive at the final amount. Add any interest or bonus if applicable. Be careful whether the base amount is your premium or the sum assured.
3. Rinse, Repeat.
Make the same calculations for the next year, and the year after that. The only difference will be the balance of the first year (B in year 1) must be added to your final amount next year.
|
Year |
Premium |
Charges |
Final amount |
Interest/Bonus |
Balance |
|
1. |
P1 |
x |
P1-x |
y |
(P1-x)+y= B |
|
2. |
P2 |
x2 |
(P2-x2)+B |
y2 |
(P2-x2)+B+y2= C |
If your policy term is 10 years, then the value in the balance column when the year column shows 10, will be your maturity benefit.
If you subtract the sum of all premiums from maturity benefit amount, you will get your net returns.
4. Consider Variable Additions.
Interest and bonuses are usually guaranteed additions; however there may also be variable additions which cannot be predicted. Therefore it is best not to take them into consideration while calculating your final amount, because it may be 10% as advertised by the insurance provider, or it may be 0%.
Therefore take only guaranteed bonuses into account while planning your long term investment.
5. Ask the million Rupee Question: Is your plan worth it?
If you invest Rs.1 lakh as annual premium under LIC’s Bima Account 2 plan, after 10 years your guaranteed maturity benefit arrives at Rs.12,63,911 (net returns= Rs.2,63,911). Obviously if you invest in a more traditional method like fixed deposits or provident fund, your net return would be much higher. The downside is that these options do not provide death benefit, or any chance of additional gains.
That is why most people invest in a term plan with very low premiums (around Rs.8000/year for a healthy 35 year old male) for the benefit of their family, and a fixed deposit that provides high (and reliable) returns in the long run.
