Term Insurance: Don’t Be Scammed into Buying these Products
What does Term insurance not mean or what it is not ?
Cash Value:
Unlike whole life or universal life insurance, term insurance doesn’t build cash value over time. This means you can’t borrow against the policy or receive a cash payout if you surrender it before the end of the term.
Maturity Benefit:
If you outlive the term of your insurance policy, you won’t receive a lump sum payment at the end. Term insurance is designed to provide coverage for a specific period, and there’s no payout if you don’t need it.
Investment Returns:
Term insurance isn’t an investment vehicle. While it provides protection, it doesn’t offer any potential for growth or returns.
Guaranteed Premiums:
While some term insurance policies offer level premiums, others may increase over time. This means your premiums could go up as you get older, even if you maintain good health.
Real Life Scenario :
What happens in real life scenario is people are mis selling or they themselves think since the money they have paid is not being return its not a good financial planning instrument.
So two most common plans are sold in the market.
Endowment plans
Are a type of life insurance policy that combines life insurance coverage with an investment component. This means that in addition to providing a death benefit to your beneficiaries if you die during the policy term, endowment plans also offer a maturity benefit if you outlive the policy term and provides guaranteed returns
ULIP ( Unit-Linked Insurance plans)
is a type of life insurance plan that combines life insurance coverage with an investment component. They provide an opportunity to participate in the market or bonds. Unlike traditional endowment plans, ULIPs offer more flexibility and potential for higher returns.
But the question is why mis-selling happens?
Higher Commission:
Your agent/ Bank gets a higher payout for selling.
Guaranteed returns :
It’s easier for agents to sell something with a guaranteed word , so they don’t have to spend a lot of time explaining
Pressure :
Banks sell these plans through their employees , they have a lot of pressure to sell.
Is it that bad at all lets see this from the case of Endowment plans from real life scenarios
Case Study :
Customer who was looking to buy insurance cover was approached by bank to with the following two proposition instead of term plan
The customer was pitched by his regular bankers to invest in this plan Called HDFC Sanchay plus ( this is not just limited to HDFC, it is all ICICI, LIC, Max etc. whatever policy you buy it would be the same.)
His banker was really persistent on him to buy this plan that he used to call him daily , putting all tactics for him to purchase . After so many pressure calls he had almost given in when i got in discussion with him and showed him the reality. So let’s study the plan.
HDFC Sanchay Plus
Current age : 30 Years
Policy term : 20 Years
Premium payment term : 10 years
Premium amount 1st year : Rs 5,22,500/-
Premium 2 nd year onwards : Rs 5,11,250/-
SI :Rs 64,37,500/- to Rs 1,27,58,919/-
Policy Year | Single/ Annualized Premium | Guaranteed | Non Guaranteed | ||||
| Survival Benefits / Loyalty Additions | Other benefits (if any) | Maturity Benefit | Death Benefit | Min Guaranteed Surrender Value | Special Surrender Value | ||
| 1 | 522500 | 0 | 0 | 0 | 64,37,500 | 0 | 0 |
| 2 | 511250 | 0 | 0 | 0 | 64,37,500 | 3,09,000 | 3,09,000 |
| 3 | 511250 | 0 | 0 | 0 | 64,37,500 | 5,40,750 | 5,40,750 |
| 4 | 511250 | 0 | 0 | 0 | 64,37,500 | 10,30,000 | 10,30,000 |
| 5 | 511250 | 0 | 0 | 0 | 64,37,500 | 12,87,500 | 6,83,148 |
| 6 | 511250 | 0 | 0 | 0 | 64,37,500 | 15,45,000 | 8,95,482 |
| 7 | 511250 | 0 | 0 | 0 | 64,37,500 | 18,02,500 | 11,41,343 |
| 8 | 511250 | 0 | 0 | 0 | 69,23,763 | 32,35,879 | 15,59,667 |
| 9 | 511250 | 0 | 0 | 0 | 74,10,026 | 37,68,008 | 20,82,332 |
| 10 | 511250 | 0 | 0 | 0 | 78,96,289 | 50,72,637 | 27,28,108 |
| 11 | 0 | 0 | 0 | 0 | 83,82,552 | 57,33,516 | 31,99,868 |
| 12 | 0 | 0 | 0 | 0 | 88,68,815 | 58,79,395 | 37,36,072 |
| 13 | 0 | 0 | 0 | 0 | 93,55,078 | 60,25,273 | 43,42,778 |
| 14 | 0 | 0 | 0 | 0 | 98,41,341 | 61,71,152 | 50,30,514 |
| 15 | 0 | 0 | 0 | 0 | 1,03,27,604 | 63,17,031 | 58,08,267 |
| 16 | 0 | 0 | 0 | 0 | 1,08,13,867 | 64,62,910 | 66,87,510 |
| 17 | 0 | 0 | 0 | 0 | 1,13,00,130 | 66,08,789 | 76,78,686 |
| 18 | 0 | 0 | 0 | 0 | 1,17,86,393 | 67,54,668 | 87,95,972 |
| 19 | 0 | 0 | 0 | 0 | 1,22,72,656 | 69,00,547 | 1,00,54,714 |
| 20 | -11729523 | 0 | 0 | 11729523 | 1,27,58,919 | 70,46,426 | 1,14,71,419 |
| Returns | 5.78% | ||||||
The policy seemed so attractive that he would make Rs 1,17,29,523/- in 20 Years.
but he forgot he had invested almost Rs 50,00,000/ and got just double the invested. A simple IRR calculation shows he would earn 5.78% IRR on this investment. Lower than your FD returns.
We could argue that it was meant for protection but let’s see how much would he have paid if we just took SI of Rs 1,30,00,000/- from day one for 20 years , which in this case is applicable in 20 years.
The same company offers us Term insurance plan for
SI – Rs 1,30,00,000/-
Payment Term : 10 Years
Policy term 20 : 20 years.
Premium : Rs 23,464/-
And now the funny part if we take this
Policy Year | Single/ Annualized Premium | Guaranteed | Non Guaranteed | ||||
| Survival Benefits / Loyalty Additions | Other benefits (if any) | Maturity Benefit | Death Benefit | Min Guaranteed Surrender Value | Special Surrender Value | ||
| 1 | 499036 | 0 | 0 | 0 | 64,37,500 | 0 | 0 |
| 2 | 487786 | 0 | 0 | 0 | 64,37,500 | 3,09,000 | 3,09,000 |
| 3 | 487786 | 0 | 0 | 0 | 64,37,500 | 5,40,750 | 5,40,750 |
| 4 | 487786 | 0 | 0 | 0 | 64,37,500 | 10,30,000 | 10,30,000 |
| 5 | 487786 | 0 | 0 | 0 | 64,37,500 | 12,87,500 | 6,83,148 |
| 6 | 487786 | 0 | 0 | 0 | 64,37,500 | 15,45,000 | 8,95,482 |
| 7 | 487786 | 0 | 0 | 0 | 64,37,500 | 18,02,500 | 11,41,343 |
| 8 | 487786 | 0 | 0 | 0 | 69,23,763 | 32,35,879 | 15,59,667 |
| 9 | 487786 | 0 | 0 | 0 | 74,10,026 | 37,68,008 | 20,82,332 |
| 10 | 487786 | 0 | 0 | 0 | 78,96,289 | 50,72,637 | 27,28,108 |
| 11 | 0 | 0 | 0 | 0 | 83,82,552 | 57,33,516 | 31,99,868 |
| 12 | 0 | 0 | 0 | 0 | 88,68,815 | 58,79,395 | 37,36,072 |
| 13 | 0 | 0 | 0 | 0 | 93,55,078 | 60,25,273 | 43,42,778 |
| 14 | 0 | 0 | 0 | 0 | 98,41,341 | 61,71,152 | 50,30,514 |
| 15 | 0 | 0 | 0 | 0 | 1,03,27,604 | 63,17,031 | 58,08,267 |
| 16 | 0 | 0 | 0 | 0 | 1,08,13,867 | 64,62,910 | 66,87,510 |
| 17 | 0 | 0 | 0 | 0 | 1,13,00,130 | 66,08,789 | 76,78,686 |
| 18 | 0 | 0 | 0 | 0 | 1,17,86,393 | 67,54,668 | 87,95,972 |
| 19 | 0 | 0 | 0 | 0 | 1,22,72,656 | 69,00,547 | 1,00,54,714 |
| 20 | -11729523 | 0 | 0 | 11729523 | 1,27,58,919 | 70,46,426 | 1,14,71,419 |
| 6.11% | |||||||
So i take out the insurance cost and you again get 6% as return on your money, So what was the use of this money invested when it could only give 6.11% return
Point to observes :
- During the first 8 years the cost of insurance was just for Rs 64,00,000/ of SI. When I checked its cost was just Rs 9,438/- So you have paid more for insurance.
- Another question was that required sum insurance you required of Rs 64 lakhs in first 8 and then 1cr in next 10 years. Definitely not any one who is contributing Rs 5 lakh as premium is looking for a better SI.
- So you have ended up paying high cost for lower sum Insurance
- Liquidity is nearly zero in case of requirement , though you can apply for a loan against these policies but that is again an issue.
- The surrender value is too less
- The only guarantee is that you would make less returns
ULIP Plan – Sampoorna Nivesh
Current age : 30 Years
Policy term : 20 Years
Premium payment term : 10 years
Premium amount 1st year : Rs 5,00,000/-
SI :Rs 2,00,00,000/-
| Gross Yield | 8% p.a | Net Yield | 6.65% | Amount in Rupees | ||||||||||
Policy Year | Annualized Premium (AP) | Premium Allocation Charge | Annualized Premium – Premium Allocation Charge | Mortality Charge | GST | Policy Admin Charge | Guarantee Charge | Other charges* | Additions to the fund | Fund before FMC | FMC | Fund at End of Year | Surrender Value | Death Benefit |
| (PAC) | (AP)-(PAC) | |||||||||||||
| 1 | 500000 | 25,000 | 475000 | 26,800 | 10,464 | – | – | – | – | 468037 | 6,334 | 467416 | 4,60,336 | 2,00,00,000 |
| 2 | 500000 | 25,000 | 4,75,000 | 26,834 | 11,645 | – | – | – | – | 965486 | 12,862 | 9,64,206 | 9,58,306 | 2,00,00,000 |
| 3 | 500000 | 25,000 | 475000 | 26,969 | 12,918 | – | – | – | – | 1494075 | 19,800 | 14,92,093 | 14,87,373 | 2,00,00,000 |
| 4 | 500000 | 25,000 | 475000 | 27,221 | 14,291 | – | – | – | – | 2055619 | 27,170 | 20,52,891 | 20,50,531 | 2,00,00,000 |
| 5 | 500000 | 25,000 | 475000 | 27,572 | 15,763 | – | – | – | – | 2652072 | 35,000 | 26,48,553 | 26,48,553 | 2,00,00,000 |
| 6 | 500000 | 15,000 | 485000 | 27,998 | 16,636 | 6,000 | – | – | – | 3290770 | 43,427 | 32,86,404 | 32,86,404 | 2,00,00,000 |
| 7 | 500000 | 15,000 | 485000 | 28,500 | 18,330 | 6,000 | – | – | – | 3969047 | 52,331 | 39,63,781 | 39,63,781 | 2,00,00,000 |
| 8 | 500000 | 15,000 | 485000 | 29,048 | 20,130 | 6,000 | – | – | – | 4689338 | 61,787 | 46,83,116 | 46,83,116 | 2,00,00,000 |
| 9 | 500000 | 15,000 | 485000 | 29,617 | 22,040 | 6,000 | – | – | – | 5454262 | 71,829 | 54,47,025 | 54,47,025 | 2,00,00,000 |
| 10 | 500000 | 15,000 | 485000 | 30,171 | 24,059 | 6,000 | – | – | – | 6266644 | 82,493 | 62,58,329 | 62,58,329 | 2,00,00,000 |
| 11 | 0 | – | – | 31,833 | 22,483 | 6,000 | – | – | 77,338 | 6614786 | 87,073 | 66,83,348 | 66,06,010 | 2,00,00,000 |
| 12 | 0 | – | – | 33,485 | 23,846 | 6,000 | – | – | – | 7065132 | 92,995 | 70,55,758 | 70,55,758 | 2,00,00,000 |
| 13 | 0 | – | – | 35,517 | 25,145 | 6,000 | – | – | 87,201 | 7459021 | 98,178 | 75,36,326 | 74,49,125 | 2,00,00,000 |
| 14 | 0 | – | – | 37,488 | 26,705 | 6,000 | – | – | – | 7968101 | 1,04,872 | 79,57,529 | 79,57,529 | 2,00,00,000 |
| 15 | 0 | – | – | 39,910 | 28,196 | 6,000 | – | – | 98,353 | 8413446 | 1,10,733 | 85,00,636 | 84,02,283 | 2,00,00,000 |
| 16 | 0 | – | – | 42,154 | 29,961 | 6,000 | – | – | – | 8988755 | 1,18,299 | 89,76,829 | 89,76,829 | 2,00,00,000 |
| 17 | 0 | – | – | 44,869 | 31,643 | 6,000 | – | – | 1,10,958 | 9492268 | 1,24,925 | 95,90,632 | 94,79,674 | 2,00,00,000 |
| 18 | 0 | – | – | 47,135 | 33,590 | 6,000 | – | – | – | 10142795 | 1,33,477 | 1,01,29,337 | 1,01,29,337 | 2,00,00,000 |
| 19 | 0 | – | – | 49,772 | 35,415 | 6,000 | – | – | 1,25,215 | 10712938 | 1,40,977 | 1,08,23,939 | 1,06,98,724 | 2,00,00,000 |
| 20 | -11585033 | – | – | 51,412 | 37,454 | 6,000 | – | – | 1,50,000 | 11450225 | 1,50,664 | 1,15,85,033 | 1,14,35,033 | 2,00,00,000 |
| 5.87% | ||||||||||||||
The return generated in this plan was also 5.87% over the 20 years of time frame.
The same company offers us Term insurance plan for
SI – Rs 2,00,00,000/-
Payment Term : 10 Years
Policy term 20 : 20 years.
Premium : Rs 28,403 /-
Even the cost of insurance is lower here Rs 28,403 vs Rs 31,627.54 and the returns accrued is low.
Observation in ULIP plan :
- The Cost of insurance is high again
- The insurance covered towards the end of the policy comes from your invested money only, the company is not paying anything. So the purpose of insurance is lost.
- Desired sum insured is still not provided.
- Liquidity only after 5 years.
Conclusion ,
- Do not mis investment and insurance, keep them separated
- Otherwise you will end paying high cost
- Get low insurance than required
- Low returns on your investments
- Low liquidity in the overall investment and financial planning scenario.
Contact us to know what is that you need rather than just falling prey to wrong plans. You can reach us : https://wa.me/message/LC5W5ZNTPSJ5L1)
