Do you Really save money by paying Premium for shorter term in Term insurance as insurance companies claim?

Earlier today I saw a famous insurance company marketing its Term plan with shortened premium Paying term. Hence I decided to make some spot check on it. In this blog I shall walk you through the same to see which is really beneficial for us.

Age: 30

User Type: Non Alcoholic/tobacco

Gender: Male.

Sum Assured: 50 Lakhs

The below table indicates the premium for various premium paying terms.

Prem Paying Term Premium Total Paid Savings %
5 ₹16,654 ₹83,270 44%
7 ₹12,504 ₹87,528 41%
10 ₹ 9,598 ₹95,980 36%
30 ₹4,976 ₹149,280 NA

The last column savings % implies to savings on total premium paid via annual mode.

So is this really beneficial to the customer/Insured? Let’s check with below illustration

Let us assume I invest this difference money in a RD/FD as illustrated below for an interest rate of 6.5%

For calculation purpose I have taken the yearly premium difference and divided it by 12 to calculate monthly difference and I have assumed it to invest the difference in a RD as per premium paying term.

For example, Yearly premium difference is ₹11,678 between 5 years and 30 years premium. (Difference of ₹16654 and ₹4976).  Now I will divide this ₹11678 by 12 to arrive at monthly difference. The monthly difference is 11678/12 = ₹973. Now I invest this ₹973 for 5 years in a recurring deposit for 60 months or 5 years.  I will have a maturity value of ₹69,074. The total column will have sum of maturity value and premium paid for 5 years.

Payment Term Total Paid Yearly Prem Difference Invested Difference in RD for 5/7/10 years @ 6.5% Total (Col 2+Col 4)
5 ₹83,270 ₹11,678 ₹69,074 ₹152,344
7 ₹87,528 ₹ 7,528 ₹66,742 ₹154,270
10 ₹95,980 ₹4,622 ₹65,060 ₹161,040
30 ₹149,280 ₹0 ₹0 ₹149,280

If you look at the above table it is clearly evident you end up paying more for 5 years, 7 years and 10 years instead of saving. If you invest the Rd maturity amount in a FD for remaining tenure your total spend would be further reduced. For example, if I invest the RD maturity of ₹69,074 after 5 years in a FD with same 6.5% the interest income will fund 94% of premium requirement. Only ₹334 rupees will be paid by you as an out of pocket expense for next 25 years. This will take the total out of pocket expense on premium to just ₹33230 for 30 years. Also you will get a RD/FD maturity of ₹69704 back.

This calculation would be similar to other terms as well.

Hence do not prey fall for these offers instead keep it simple to pay your plans annually.

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