Insurance was earlier designed specifically to protect the family with any unfortunate happenings to the breadwinner of the family. The product has now added the benefit of getting returns as well together with the Sum Assured.
However, it seems very difficult to compare which policy suits you best and which gives you a better return. There are mainly two types of policies; one is the Term Plan which is a pure insurance where there is no return and the only death benefit is provided to the family, in case of death during the policy term.
The second type of policy is where you get your investment back with various returns depending upon the type of policies you have opted for. In this category, there are majorly two types of policies
1.Endowment/ Moneyback plans: Endowment and Moneyback plans are same; the only difference is that in Moneyback you get part payments at multiple intervals during your policy term whereas in Endowment plans you get your payments only on maturity of the policy. The calculation of returns on both types of policies remains the same. Now let’s understand how the policy works and how you earn your returns. Whatever premium you pay, some part of it goes for your sum assured and some for the administrative charges; the rest gets invested which accrues returns every year. These returns get accumulated as the policy matures.
- Policy Case: Let’s take an assumption here of
Endowment plan term -20years
Sum Assured-5 lacs
Premium payable- Rs. 25,000 per annum
Maturity Return/Benefit/Value – Sum Assured + Bonus declared
Bonus- 3.5 lacs(an approx assumption)
- Illustrations of Return calculation: Below is the calculation of returns. The premium you pay is actually the cash outflow from your pocket and whatever return you get is the cash inflow. In this case, the cash flow is only at the time of maturity. So at the end of the policy that is in the 20th year, you get Rs.8,50,000 cash inflow as assumed in the policy (S.A. + Bonus declared). Also, you make a payment of a premium of amount Rs.25,000, so your net cash inflow becomes Rs.8,25,000.
On the basis of this return, you can calculate the IRR on your excel sheet by using this IRR function. Keep in mind that this initial investment has to be in negative number. Put =IRR in the last cell and select all the data of the column from the 1st premium value till the net cash inflow amount and then press enter. You will get the required IRR value and this is the return which you look for. The policy assumed here will incur 4.56 per cent return.
If you have taken a moneyback where you have multiple cash flows, the calculation will remain same only the data in the cash inflow will have input and similarly, the net cash inflow in that particular year will have the amount remaining on hand after deducting the annual premium.
2.ULIP: Unit Linked Insurance Plan(ULIP)is the market linked plan where your money gets invested in shares and stocks and other investment products. Here you have the leverage to take out money after 3 years however, there are certain penalties for the same and the fund value also get decreased.
- Policy Case: ULIP term -10yrs
Annual premium- Rs 50,000
Amount took out at 10th year– Rs.12,00,000
Payment only for – 1st,2nd,3rd, 7th and 8th year… 4th, 6th and 9th year no payment made and on 5th year Rs. 1,00,000 was taken out.
- Illustrations of Return calculation: Here you see that the policyholder takes out a handsome amount and the return is also very impressive. Please note that it is an assumption where the market is giving a very good return that the value of your fund becomes Rs.12 lacs which don’t happen in real case every time.
| Years | Premium |
| 1 | -50000 |
| 2 | -50000 |
| 3 | -50000 |
| 4 | 0 |
| 5 | 100000 |
| 6 | 0 |
| 7 | -50000 |
| 8 | -50000 |
| 9 | 0 |
| 10 | 1200000 |
| IRR | 31.74 per cent |
In ULIP there are two types of provisions; one where you get Sum Assured or the Fund Value whichever is higher on death and the other is where you get both in the case of death.
People have become more aware nowadays, but more awareness is required in terms of insurance products. The essence of the insurance is the financial support for the family in case of death and not as a true investment product. If you are looking forcomplete investment purposes, then there are many higher yielding investment products available in the market. You can opt for that while going for term plan at a lower premium with higher Sum Assured.
This article is written by Naval Goel- CEO and Founder of PolicyX.com.
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