Should you buy a term plan with a discount on the premium?
When you are 28 years of age and you buy a 2 Cr term insurance with an option to pay the premiums in 10 years with 50% discount instead of paying the premiums till cover age, you have already lost 1 crore (not adjusted for inflation).
Let's say Ram, aged 28 years, is buying a term insurance for 2 crores that will cover him till 65 years of age. He chooses to pay it annually till 65 years.
Ram:
Annual Premium: Rs. 22800 p.a.
Lifetime Premium (considering he lives till age 65): Rs. 843600
Pays premium till age: 65
There's another guy, Gaurav, who is a friend of Ram, also aged 28 takes Term insurance for 2 crores till age 65. But he chooses to pay it in 10 years at a 43% discount. Great deal right? Who would want to miss such a hefty discount. Only later he realised that he'll never get a profit out of this arrangement.
Gaurav:
Annual Premium: Rs. 48000 p.a.
Lifetime Premium (considering he lives till age 65): Rs. 480000 (43% discount)
Pays premium till age: 38
Scenario 1 - Age 36:
Ram and Gaurav both go for a road trip. Unfortunately, both of them met with an accident and died in the age of 36.
Their nominees get 2 crore insurance claim.
But, Gaurav would have paid 2 Lakhs more premium than Ram. On top of that, he would have lost an opportunity to make around 3.5 Lakhs (considering 10% p.a. return).
Total loss to Gaurav - 5.5 Lakhs
Scenario 2 - Age 58:
This is where Gaurav thinks he made a better decision but he actually didn't.
Ram and Gaurav both go for a road trip. Unfortunately, both of them met with an accident and died in the age of 58.
Their nominees get 2 crore insurance claim.
In this scenario, Ram would have paid Rs. 2 lakhs more than Gaurav. Gaurav thinks he made a better decision by paying the premiums early. But Gaurav lost an opportunity to make around Rs. 32.5 lakhs with the premium he had paid extra.
Total loss to Gaurav: Rs. 30.5 Lakhs
Scenario 3 - Age 70:
Ram and Gaurav both go for a road trip. Unfortunately, both of them met with an accident and died in the age of 70.
Both their nominees will not get any cover amount from the insurance company.
But, Gaurav would have made 1 crore with the premium he had paid to the insurance company had he invested it in any financial instruments which give at least 10% p.a. return (This is achievable since equity market on a long term gives on a average 13-14%. Even FDs give 7% p.a. return)
Hence Gaurav is always on a loosing side. So, don't fall for this trap of buying term insurance with 40-50% discount.
Cheers!
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