How are returns calculated on your money-back policies?
Premium- Money-back policies are designed in a way that guarantees a payback at regular intervals, as some percentage of the sum assured
How can one calculate return on investment (ROI) in money-back policies? How much money is paid to the insured if the person is alive at the time of maturity of the policy?
— Name withheld on request
Money-back policies are designed in a way that guarantees a payback at regular intervals, as some percentage of the sum assured. Further at the time of maturity, a certain percentage of the sum assured is guaranteed along with loyalty and accrued bonuses. The loyalty bonus is a fixed percentage defined in the plan. The accrued bonus however is declared at the end of each year by the insurer. This depends on the actual returns generated by the insurer on its investments.
To calculate the ROI, all expected cashflows and premium payments should be discounted to the present day. The discount rate at which the present value of all future cash flows and all premiums are the same would be the effective yield of such a plan.
Let’s assume in a moneyback policy, you are expected to pay ₹10,000 annually for the next 10 years. Further, you are assured payment of ₹30,000 on 3rd, 6th and 9th year anniversary of the policy. Also, at the time of maturity at the end of 10 years, you are assured a payout of additional ₹30,000. In such a case, the effective yield of the plan would be 7.5%.
I have taken a term insurance policy of ₹50 lakh with a critical illness benefit rider. I would like to know if this rider is beneficial in the long term which has an additional premium or should I buy new health insurance by closing the critical illness rider of the said policy?
— Name withheld on request
A standard health insurance and a critical illness plan serve two different objectives. Health insurance plan is meant to cover hospitalization expenses of all kinds. This could include treatment for a vector-borne disease such as dengue or for a critical illness such as cancer. The health insurance plan would only reimburse the actual expenses incurred during hospitalization.
Often, dealing with critical illnesses involves a substantial financial burden besides hospitalization expenses. This would include non-medical expenses to suit the changed lifestyle of the patient, loss of income due to prolonged absence from work, and reduced future income capacity.
A critical illness rider helps defray some of these financial costs. A critical illness plan or a rider, pays a lump sum in case one of the named illnesses is diagnosed. The actual expenses incurred by the patient does not have any bearing on the claim. It is possible to make a claim from both the health plan as well as the critical illness rider. Considering the above, I recommend you keep the critical illness rider, and buy a separate stand-alone health insurance plan as well.
Abhishek Bondia is principal officer and managing director, SecureNow.in.