# Money back life insurance policy typically yield an effective return of 3% to 5%

Published in Mint on 22nd January, 2018. Written by Abhishek Bondia

How does one calculate the net returns from a money-back insurance policy? I was shown two sample calculations but I am not sure if these are realistic. I want to calculate on my own.

—Sahil Seth

The principle of estimating net returns is to calculate the internal rate of return (IRR). In this concept, you determine the implied interest rate in the product. You can do this using the IRR function in a spreadsheet like Excel. You will have to write out all the cash flows expected. These are given in the illustration and then apply the IRR function. Or you could ask your adviser to do this calculation for you. The IRR calculated can then be compared to the interest rate earned in other investment products. IRR in traditional money back policies is usually 3% to 5%.

What is the difference between special surrender value and guaranteed surrender value?

—Jinny Joseph

A guaranteed surrender value is defined by regulations and special surrender value is defined by the insurer differently for each plan. The special surrender value is more than the guaranteed surrender value.

Regulations require that all plans with premium-paying term of more than 10 years, should acquire a guaranteed surrender value after 3 years. Before 3 years, the plan need not have a surrender value by law. After 3 years, the insurance acquires a guaranteed surrender value which increases with time. This is expressed as a proportion of the total premiums paid and is generally less than 100% of premiums paid.

Special surrender value is defined individually for each policy. Typically, every policy will have a unique table with the surrender value that is defined based on the year in which the policy is surrendered.

Are term plans available for senior citizens as well? I am 65 years old, and hope to ‘retire’ from my private company by age 67. I have planned for expenses till age 75 but not after that. In case I pass away before my wife, I want her to be financially secure in my absence. Will a term plan help in this case?

—Brijnath Prashar

You appear to have two distinct needs. The first is the risk of living long beyond 75 when you will not have money for expenses. Second, dying early without your wife being financially secure.

Both these will be met by different products. An immediate annuity can help you address the longevity need, by paying an annuity for life. A term plan can address the risk of early death. Getting a term plan after 60 is possible but generally expensive, particularly if you suffer from any pre-existing conditions.

If I buy a plan online, would it be cheaper? Does it matter if I buy through an agent? Do I get charged extra for that?

Deval Malhotra

Insurers may offer different plans online and offline with varying rates. However, premium for the same plan is not loaded whether it is sourced through an agent or any other intermediary. Several insurers offer a cheaper version of a term plan online vis-à-vis their offline counterparts.

An intermediary helps in selection of appropriate sum assured, term and riders for a plan. Further, a professional intermediary is expected to guide on the proper documentation and follow-up with the insurer for medical and financial underwriting. Finally, in case of a claim, the nominee should be able to leverage the intermediary to get the claim settled.

Is a life insurance plan, a good alternative to Public Provident Fund (PPF)?

Gajanan Vyas

PPF and life insurance meet different objectives and are not alternatives to each other. The PPF is a government-supported small savings scheme. It requires investments for at least 15 years. The interest rates for PPF are reviewed every quarter and historically have been relatively high. It is a good way to save, is tax efficient, and is for long-term objectives.

The primary purpose of life insurance is to provide financial security, which means a large financial benefit if you die early. However, many insurance plans combine the investment and protection objectives. The nature of investment’s returns depend on the type of insurance. In unit-link insurance plans, these are market linked and in traditional plans, the returns tend to be 2% to 4% less than the long-term government bond rates.