Why Monthly Term Insurance is Beneficial
When it comes to choosing a term insurance policy, it’s important to consider the long-term financial benefits. In the case of my nephew Diwakar (Age-37years) with 30L yearly package, opting for a monthly premium plan till the age of 85 years can be much more advantageous even though it appears costly if you total up the cost of all premiums.
Comparing the Options
Initially, both the 5-year and 10-year pay-out plans seemed reasonably good, with a premium of approximately 10 lakhs for both. However, upon further analysis, the monthly premium option proved to be much more financially beneficial.
By opting for monthly premiums, Diwakar would pay between 17.28 lakhs to 23 lakhs over a time horizon of 48 years. This is significantly more compared to the 5-year or 10-year pay-out plans, resulting in extra payment of 72% or more.
The Financial Advantage of Monthly Premiums
In hind sight it appears better to opt for 5yrs/10yrs premium plan, but let us see what happens when Diwakar decides to invest this amount himself. But how does the monthly premium option fares in terms of investment returns?
To assess this, let’s consider an example:
Diwakar decides to invest 2 lakhs per year in a relatively safe equity instrument with an expected return of 8% per annum. At the end of the first year, he pays 36,000 rupees for 12 monthly term plan instalments. He repeats this process for the first five years i.e he keeps investing Rs 2Lac per year for first 5 years as he was expected to do with 5 Years pay-out plan.
Surprisingly, within the first three years, the yearly interest earned from the corpus (48,000 rupees) exceeds the yearly premium amount (36,000 rupees). This means that Diwakar doesn’t have to pay any more premiums, as his investment returns will more than compensate for any increase in future premium.
If Diwakar continues paying premiums for the first five years, his corpus at the age of 85 years will be a staggering 1.8 crores, despite only paying 17.28 lakhs in premiums. And if he invests in index funds with conservative returns of 12% the amount becomes 13.12 crores. This I consider real smart planning by Diwakar.
It’s important to understand that when we pay premiums in advance, it is always at our cost. By opting for monthly premiums, Diwakar can benefit from significant savings and a substantial corpus at the end of the policy term. The most important point to ponder now – “is 1.5Cr term insurance adequate for Diwakar?”