Wealth special: Buy free insurance, then pay the price

A jewellery store in Mumbai had this scheme on offer: Buy jewellery for free!

Of course, it isn't that simple. You would have to pay the store when you buy jewellery. But they promise to return the amount to you after 10 years! And, guess what, you don't have to part with your jewellery!

How does it work? Well, of the total amount they charge you for the jewellery, they would subtract the costs and invest the rest in a financial schemes (like a bank deposit or mutual fund). That invested amount would multiply and become equal to the purchase price after 10 years!

So, the store ensures that if you had any doubts about paying for an expensive piece of jewellery, the scheme would change your mind!

Now life insurance companies have adopted the same trick. If you had any doubts about buying a plain term insurance policy (where you didn't get back anything after the policy matured), then insurance companies offer a scheme called 'return of premium' (ROP).

Should you buy? In simple terms - NO! Here's why!

About ROP

In a simple term plan, if you outlive the term of the insurance policy you get nothing. That is, the nominee gets the sum assured only on the death of the insured.

In a ROP plan, you will receive all paid premiums on surviving the term of the policy.

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Is there a value addition?

Okay, but does this product add value for the customer? The premium quotes for pure term insurance plans and ROP from an insurance company will tell you the story.

If you are 25 years old and want to buy a cover of Rs 25 lakh for 30 years, here is how much you would pay as premium per annum under each option:

Plain term: Rs 6,966

ROP: Rs 14,570

Death benefits

If the policyholder dies during the term of 30 years, his nominees will get Rs 25 lakh under each option.

Maturity benefits

If the policyholder survives till the end of the term of 30 years, he gets nothing in a plain term policy. If its a ROP, he gets back Rs 437,100 -- which is a total of premiums paid over 30 years.

Does it make sense? - NO!

Now, instead of buying an ROP, you buy a plain term (premium of Rs 6,966 per annum) and you invest the difference of Rs 7,604 (ie, Rs 14,570 - Rs 6,966) in a bank deposit with a post tax return of 6 per cent per annum.

At the end of 30 years, you will have Rs 637,228 as the maturity value of your bank deposit. That is Rs 2 lakh more than what you would get in a ROP policy (Rs 637,228 - Rs 437,100).

Caution: The insured has to pay every premium till the end of the tenure to qualify for the return of premium.

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Conclusion:

• The insurer only pays back what you have paid them, not a paisa more.
• You earn no interest. There is no adjustment for inflation.
• There is definitely no rate of return as there would be in an investment plan.