I am doing this post for the umpteenth time..please see all my posts on term insurance, if you want a comprehensive view.
By the time a few of us had shouted ourselves hoarse that ‘Term’ insurance is the only product to buy, the brilliant life insurance companies came up with some smart ideas:
a. Riders to the Term plan
b. Term insurance with Return of Premium
Riders are like a topping – looks harmless, may or may not help in what it is supposed to do, but makes money for the life insurance company. So here you were to buy a term life policy and were paying Rs. 8000 per annum as premium. Suddenly the agent offers you a variety of riders and your premium is now a healthy Rs. 15600. Good the agent, and the manufacturer made some money in selling you some accident insurance or critical illness riders. Good for them, confusing for you. Mostly a waste of money. Take an accident policy as a stand alone and it could have been much cheaper, and easy to understand. For example this rider could say ‘will not cover accidents happening inside the house’. So you committed the cardinal sin of buying what you did not understand. Cannot blame you, the product design and the obfuscation of the BFSI is meant to do exactly that.
Term insurance with Return of Premium: this is one of the biggest obfuscation ideas of the insurance industry. When I ask people to take term policies, I ask them to take a term plan with premia to be paid on a quarterly basis. Lets assume you have a term insurance with H life Insurance company, and you are paying Rs. 3900 a quarter. You just paid the premium on 17th December, 2016 and that was till March 2017. Now on 22nd Dec you see another life insurance company offering you exactly the same product at a premium of 3240 per quarter. Well you can go ahead and buy the new policy IMMEDIATELY – and by the time the new policy comes in your next premium may be due! At least you did not say “omg i just paid the annual premium I will have to wait till next year”. Every year you get 4 chances to decide whether to continue the policy. When you pay annually, you get only one chance.
Now look at a Term Insurance with Return of Premium as a cheaper version of the ULIP. If you had a choice of a term insurance or a term insurance with return of premium, the pricing difference would be X and 4X at the least. So instead of paying Rs. 2100 a quarter you will pay about Rs. 8100 a quarter. After 4 years you find a new plan from a rival company at a lower rate. Can you throw away your plan? Of course, but you are likely to lose a big chunk of the money that you paid – possibly all the money that you paid.
This means the whole purpose of taking a term plan – of being able to throw it away when you do not need it or replace it with a cheaper alternative is lost.
Why would you buy a Term Plan with R.O.P? Simple because the Income tax department will not chase it as a perquisite and it is an easy and nice way to compensate a high end executive. How? that’s a different post is it not?
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