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A lot has been written in our Insurance segment on why traditional plans like money-back policies and endowment life insurance policies are the worst kind of investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... More.

In fact, insurance should never be mixed with investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... More. 

We are not the only ones propagating this theory, but many others working in the field have also been reiterating that the best life insurance policyAn insurance policy gives you the right to reimbursement or payment from an insurance company for losses agreed up on in a defined contract. A life insurance policy for example, needs the insurance company to evaluate a claim on the... More is a term life insurance policyAn insurance policy gives you the right to reimbursement or payment from an insurance company for losses agreed up on in a defined contract. A life insurance policy for example, needs the insurance company to evaluate a claim on the... More. It is reasonably priced and allows you a large death benefitThis includes the sum assured and any other pay outs like bonuses or accumulated fund value in case of a unit linked plan. This is what is ultimately paid out for the insurance claim made by the beneficiaries. More in case of untimely demise. 

There is however no return of premiumThis is the amount you pay for keeping an insurance policy active. Usually paid in a lump sum at the start of the policy term or annually through the term, it includes all the charges and levies by the insurance... More paid; many falsely look at that as a loss. However, the right way to look at this is as a cost you pay for protecting your family’s financial future. It is not an investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... More. 

Nevertheless, human psychology doesn’t allow us to just let go of the premiumThis is the amount you pay for keeping an insurance policy active. Usually paid in a lump sum at the start of the policy term or annually through the term, it includes all the charges and levies by the insurance... More paid, especially now that another option called – return of premiumThis is the amount you pay for keeping an insurance policy active. Usually paid in a lump sum at the start of the policy term or annually through the term, it includes all the charges and levies by the insurance... More– has been introduced for term life insurance policies. 

It’s a lure; we say term policy is the best way to get life insurance and now they are returning premiumThis is the amount you pay for keeping an insurance policy active. Usually paid in a lump sum at the start of the policy term or annually through the term, it includes all the charges and levies by the insurance... More! What better way to get insured? Unfortunately, there is a catch. Once again you are getting lured into an investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... More via insurance. Getting any kind of money back in insurance is technically an investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... More.

In all such cases, it’s always cheaper and more efficient not to opt for it. 

Here is why.

The calculation

At the very beginning, I am going to put for the numbers which simply don’t make sense. 

You are a 30-year-old woman, earning ₹15 lakh or more and looking for ₹1 crore life cover. 

• You can get a term life insurance policyAn insurance policy gives you the right to reimbursement or payment from an insurance company for losses agreed up on in a defined contract. A life insurance policy for example, needs the insurance company to evaluate a claim on the... More for slightly cover with any life insurance provider. We will take the example of two large private sector insurers, HDFC Life Insurance and ICICI Prudential Life Insurance. 

Both offer discounts on term life policy premiumThis is the amount you pay for keeping an insurance policy active. Usually paid in a lump sum at the start of the policy term or annually through the term, it includes all the charges and levies by the insurance... More if bought online.

• HDFC Life has a term policy that you can buy for the next 35 years at a monthly cost of ₹1195 or an annual cost of ₹13,655. The premiums paid will not be returned.
• You have the option, in this same policy to get your premiumThis is the amount you pay for keeping an insurance policy active. Usually paid in a lump sum at the start of the policy term or annually through the term, it includes all the charges and levies by the insurance... More back. However, now the premiumThis is the amount you pay for keeping an insurance policy active. Usually paid in a lump sum at the start of the policy term or annually through the term, it includes all the charges and levies by the insurance... More itself increases to ₹29,339 a year. 
• Over a period of 35 years till you turn 70 that is a difference of ₹5,48,940. 

DING – You are paying more to avail of the facility of getting your money back!

And you thought it was going to be a free lunch.

Let’s not stop here. The difference in the annual premiumThis is the amount you pay for keeping an insurance policy active. Usually paid in a lump sum at the start of the policy term or annually through the term, it includes all the charges and levies by the insurance... More of the two plans is roughly ₹15,684. 

• You can take this amount and break it up into equal monthly investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... More amounts of ₹1300 and invest in equity-oriented mutual funds. 
• Let’s assume a modest 10% return over the 35-year period of the policy. 
• Over this time your monthly ₹1300 will grow to a princely ₹50 lakh!

DING: By opting for the regular premiumThis is the amount you pay for keeping an insurance policy active. Usually paid in a lump sum at the start of the policy term or annually through the term, it includes all the charges and levies by the insurance... More term policy instead of the return of premiumThis is the amount you pay for keeping an insurance policy active. Usually paid in a lump sum at the start of the policy term or annually through the term, it includes all the charges and levies by the insurance... More, not only are you saving money but also earning a lot more by investing it correctly. 

• Some policies will further entice you with a survival benefit at maturity, assuming you are alive at the end of the policy term. Even this pay out pales in comparison to the investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... More return you can get on your regular investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... More with the excess premiumThis is the amount you pay for keeping an insurance policy active. Usually paid in a lump sum at the start of the policy term or annually through the term, it includes all the charges and levies by the insurance... More paid for return of premiumThis is the amount you pay for keeping an insurance policy active. Usually paid in a lump sum at the start of the policy term or annually through the term, it includes all the charges and levies by the insurance... More facility.

We ran the same data with ICICI Prudential iProtect Smart and its return of premiumThis is the amount you pay for keeping an insurance policy active. Usually paid in a lump sum at the start of the policy term or annually through the term, it includes all the charges and levies by the insurance... More version. The difference in annual premiumThis is the amount you pay for keeping an insurance policy active. Usually paid in a lump sum at the start of the policy term or annually through the term, it includes all the charges and levies by the insurance... More for this policy, assuming a maturity age of 65 years and a policy term of 30 years, is ₹10,500 annually. Which is a difference of ₹3,15,000 over a period of 30 years. 

Use this ₹10,500 to invest ₹875 every month for the next 30 years in equity-oriented mutual funds at an assumed return of 10% a year; you will get ₹20 lakh at the end of the 30 year period. Again, this is a lot more than any return of premiumThis is the amount you pay for keeping an insurance policy active. Usually paid in a lump sum at the start of the policy term or annually through the term, it includes all the charges and levies by the insurance... More or survival benefit amount that the policy will payout. 

DING: Take control of your money, separate insurance, and investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... More in ALL FORMS.

The conclusion

Why do insurance companies charge you so much more than you should pay? Unless you work for one, you may never know and even if you do work for one, you may not know. 

If we can figure out the most effective and efficient way to invest money for long periods or decades, it’s hard to imagine that insurance companies don’t already know this. If they do, then what stops them from at least passing on the benefit to you after deducting their charges?

Who knows, it could be to bolster profits or it could be to sustain the cost of a vast distribution network. Or it could be any other reason. 

Rather than speculating on what life insurance companies do and what motivates them, let’s focus on how you can take responsibility for your money choices. 

DING: Mixing insurance and investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... More is absolutely the wrong choice!

Be smart and make aware money choices, control what you can, and leave the rest up to evolution!