Raj: Hey Vijay, I’m thinking of buying a life insurance policy with a limited premium payment option—pay for just 10 years and get coverage for 25 years. Seems like a win-win, right?
Vijay: It sounds good at first, Raj. But have you looked at the details? These limited premium plans often look attractive on paper, but there are some real downsides.
Raj: Really? Like what?
Vijay: First off, the annual premium is much higher because you’re paying for a long-term cover in a shorter period. It can become a heavy burden on your yearly budget.
Raj: Hmm. But at least I won’t have to worry about paying premiums after 10 years.
Vijay: True, but the returns you get from these traditional policies are very low—somewhere around 4 to 6% per annum. That’s barely beating inflation. You’re locking up a lot of money, and getting little in return.
Raj: I thought these plans give bonuses too?
Vijay: They do, but even with bonuses, the overall return doesn’t go much beyond 5–5.5%. Plus, the opportunity cost is huge. If you had invested the same amount elsewhere—like mutual funds or even PPF—you’d likely end up with a much larger corpus.
Raj: But at least my money is safe, right?
Vijay: That’s a common perception. But what if you need to exit early due to an emergency? The surrender value in the first few years is very low, and you could lose a significant chunk of your money.
Raj: Okay… that doesn’t sound great. So how do insurance companies benefit from this?
Vijay: Good question. They collect your premiums upfront, invest them in long-term instruments like government bonds earning 7–9%, and return only a small part to you. Plus, many policies lapse or are surrendered early—so they make money even if you don’t complete the term.
Raj: Wow, that’s stacked in their favor.
Vijay: Exactly. Let me give you a real example. A 35-year-old man buys a traditional limited premium policy with a Rs. 10 lakh life cover. He pays about Rs. 68,000 per year for 16 years, which is Rs. 10.96 lakh in total.
Raj: Okay.
Vijay: At maturity after 25 years, the insurer projects he’ll get around Rs. 24.5 lakh, assuming the best-case bonus rate. That’s an annual return of just around 5.3%. If bonuses are lower, he may get only Rs. 18.5 lakh—an IRR of just 3.4%.
Raj: That’s less than what a decent FD gives!
Vijay: Exactly! And if he were to pass away in the 10th year, the nominee would receive Rs. 10 lakh plus accrued bonuses—maybe around Rs. 13 lakh total. But by then, he’d have already paid about Rs. 6.8 lakh in premiums.
Raj: Hmm. So what would you suggest instead?
Vijay: Simple. Buy a term insurance plan for Rs. 1 crore. It’ll cost you around Rs. 8,000 per year. Then invest the remaining Rs. 60,000 every year in mutual funds. Over 16 years, that investment could grow to Rs. 41 lakh or more at 10% CAGR by the time 25 years are up.
Raj: That’s a huge difference. And I get 10 times the life cover too!
Vijay: Exactly. That’s the power of separating insurance and investment. Insurance is meant for protection. Investment is meant for growth. Combining both usually benefits the insurer, not you.
Raj: Thanks, Vijay. You just saved me from making a costly mistake.
Vijay: Anytime, Raj. Just remember: If it sounds too convenient, it’s probably more convenient for the insurer than for you.
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