Not insurance, but a savings policy

Publication: Business Standard Mumbai;   Date: 2 November, 2008;    Section: Product Analysis;   

Yet another product that defies the basic principle of not mixing insurance with investment.

Most insurance buyers forget one simple thing – they should be buying only life, health or any other cover from insurance companies. Instead they lose their focus and buy products, which are completely different in nature. Here we give you one such example.
Take for instance, HDFC Savings Assurance Policy. The marketing material of this policy reads something like this: “You need to plan today to ensure a bright future for your child, build your dream home and fulfil all your other aspirations. To help you realise your dreams, we present HDFC Savings Assurance Plan.” Interestingly, in spite of being an insurance policy, there is absolutely no mention of life insurance cover at all.

So what does this policy do? It is a profits’ savings policy and has the following features:

* There are simple reversionary bonuses, which are added annually

* On maturity, the policy pays out a basic maturity benefit and reversionary bonuses declared during the policy term.

On death during the first year, a sum equal to 80 per cent of premiums received is payable, implying that if you are paying a premium of Rs 1 lakh, you will only receive Rs 80,000 as the death benefit in the first year.

Further, on death after the first year and during the policy term, all premiums paid to date will be returned with compound interest calculated at 6 per cent a year, subject to a maximum of the sum assured plus reversionary bonuses declared to date.

This basically implies that you get the total premiums paid till date plus 6 per cent compound interest OR the maturity benefit plus any attaching bonuses, whichever is lesser.

Let us understand this with an example. Suppose you buy a policy for a yearly premium of Rs 1 lakh for 10 years and a maturity benefit of Rs 8.41 lakh. If you die after paying premiums for the first two years, your family will get Rs 2 lakh plus 6 per cent compound interest for 2 years, and not the sum assured or maturity benefit of Rs 8.41 lakh.

Also, if you pay 10 premiums, which is Rs 10 lakh and then die, you will get the lesser of Rs 8.41 lakh (plus any attaching bonuses) OR Rs 10 lakh (premiums paid) + 6 per cent.

Generally, endowment plans combine savings and protection. You are given a life cover just like any other insurance product. If you die during this period, your beneficiary will get whatever amount you are insured for plus any bonuses accrued during the period. If you survive the period, then on maturity, you get the sum assured plus all bonuses accrued in the policy. This kind of policy combines savings (because the money is given to you on maturity) with protection (your nominee gets an amount if you die).

However, the kind of life cover that you receive in this policy is quite low. What is the use of paying such high premiums when the insurance cover is so pathetic? Also, if this product is being positioned as an investment plan, then any debt instrument such as the Public Provident Fund (PPF) would give higher returns at 8 per cent.

On survival to the maturity date, the sum assured stated against HDFC Savings Assurance – Maturity Benefit plus any attaching bonuses is payable on the maturity date. This policy, in fact, provides one of the worst covers that we have witnessed in a long time.

Remember insurance is all about ensuring your family’s security in case something happens to you today. When a person could have got a decent cover of Rs 75 lakh by just paying Rs 19,500 annually, why does he have to pay five times that amount for a negligible cover?

The sum assured is just the premiums that you have paid plus some basic level of return. People often mix investments with insurance. This causes them to often look at the sum assured without understanding the death benefits of the policies in detail. At the same time, one gives a lot of weight to amount on maturity rather than on death benefit. Hence, people end up paying high premiums, but get a low cover. Stay away from such afflictions and do not mix insurance with investments.

The writer Amar Pandit, is a director, My Financial Advisor

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