With non-participating traditional life insurance plans, returns are known upfront.
Unlike participating plans such as LIC New Jeevan Anand, the final outcome depends on annual bonuses and final bonus. There is no such concept in non-participating plans.
The name (non-participating) itself suggests that the policyholders will not participate in the profits on the insurance company.
Non-participating traditional life insurance plans provide guaranteed returns.
So, you have a product that provides life cover along with guaranteed returns.
Should you consider investing in such a product?
Let’s find out.
As always, I will pick up a non-participating life insurance product from an insurance company and figure out merits and demerits. You can expect other such products to provide similar benefits.
In many of my earlier posts, I have used plans from LIC to demonstrate how traditional plans are not much use and should be avoided. And I have received quite a few bitter comments, many of those from LIC agents I think.
No thorough reasoning. Pure rhetoric.
I thought it would be a good idea to consider an insurance plan from a private insurance company. Therefore, I picked up HDFC Life Sanchay Plan.
Salient Features of HDFC Life Sanchay
Policy Term: 15 years or 25 years
Premium Payment Term: 5, 8 or 10 years
No need for complex calculations. Maturity benefit is crisply defined in the policy brochure.
What about returns?
The annual base premium for a 30 year old for policy term of 25 years and premium payment term of 10 years is Rs 130,562.
After taxes, the premium will be Rs 135,458 in the first year and Rs 133,010 in the subsequent years.
If the policy holder survives the policy term of 25 years, he/she will get Rs 32.5 lacs (325% of the Sum Assured).
This means you earn a princely return of 4.4% p.a. over 25 years.
Need I say more.
How much will you compromise for this guarantee of returns?
Do note these returns are for a 30-year old. If you buy at an older age, your returns will be even lower. This is because annual premium increases with age while the maturity benefit remains the same.
For instance, for a 40- year old, the base premium will be Rs 133,200, reducing returns to 4.3% p.a.
For a 25 year old, the base premium will be Rs 128,272 and the return will be 4.5% p.a.
Why this fixation with Sum Assured?
Why does the brochure mention that you will get 325% of Sum Assured?
Since the return is known upfront, can’t the insurance company simply tell that the annual returns from this policy will be 4.4% p.a.?
There is no better way to understand the returns from a policy and compare the returns with other investments.
However, insurance companies and agents know that no one will purchase the plan if the annual returns are 4.4% p.a.
And that is why this charade of linking everything to Sum Assured. A very clever ploy to complicate return calculations and confuse the prospective buyers.
We cannot calculate actual return (IRR) mentally. And insurance companies are aware of this limitation.
This is why HDFC Life preferred to state that you will get 325% of Sum Assured after 25 years (rather than saying you will earn a return of 4.4% p.a.).
What about PPF and Term Insurance Plans?
Many of us are not comfortable with volatility in equity MF returns. Therefore, wouldn’t bring in equity mutual funds anywhere.
I hope not many have anything against PPF.
What if you had purchased a term plan and invested the remaining amount in PPF every year?
PPF returns, even though guaranteed, can change every quarter.
Let’s assume PPF earns you 7.0% p.a. This rate is far lower than 7.9% p.a. currently.
You purchase a term plan of Rs 1 crore from HDFC Life. The premium for a 30 year old for Sum Assured of Rs 1 crore for 25 years (premium payment term of 10 years) will be Rs 15,389.
If you invest the remaining amount in PPF, you will end up with Rs ~48.1 lacs at the end of 25 years.
Book Suggestion: Retire Rich, Invest Rs 40 a day (P.V.Subramanyam)
Life cover of Rs 10 lacs and final maturity amount of Rs 32.5 lacs. (HDFC Life Sanchay)
Life cover of Rs 1 crore and final maturity amount of Rs 48.1 lacs (Term Insurance + PPF).
PPF return assumed at 7% p.a.
Which one would you choose?
Term Insurance + PPF is a clear winner.
Traditional plans provide low life cover and poor returns.
The sooner you understand this, the better it is.
Avoid traditional life insurance plans.
In this post, I have been critical of non-participating plans such as HDFC Life Sanchay. This does not mean participating traditional plans are better. I have reviewed many participating plans on this blog and shown that such plans should be avoided.
Under participating plans such as LIC New Jeevan Anand, the sales pitch is more about annual bonuses. The caveat is that these bonuses, though announced every year, are paid only at the time of maturity. Moreover, you do not earn any return on these bonuses.