- Wealth PMS
A telecaller tried to sell me this "Money Back" policy by SBI Life. The concept was explained like this:
You pay a 30K per year premium for 7 years, for a total of Rs. 210,000. You get life insurance of Rs. 300,000. In the 8th year, you get back 30% of the sum assured (or Rs. 90,000) and in the 9th and 10th, you get back 35% and 45% respectively, plus you get a non guaranteed vested bonus as well. That’s a return of at least Rs. 330,000 plus bonuses, on an investment of 210,000, in 10 years.
Now comes the mis-selling.
First, the guy told me, without qualms that "The premium paying term is 7 years only". I checked the brochure. There was no such statement. I prodded for written documentation of a reduced payment term.
The agent then admitted that they massaged the logic a little. See, you get some money back in the 8th year? So you pay that as the next year’s premium. Aapke haath se to kuch nahin gaya na? (You didn’t have to put money from your pocket)
I was stunned. It was of course from my pocket. Just because you change the wording doesn’t mean anything, especially if you muddle up all the results. If you consider his logic, you pay Rs. 30,000 for 7 years, then when you get back the 90,000 in the 8th, you use that to pay off the 30K premium, leaving you with only 60,000 that year. But they don’t tell you this upfront.
It gets worse. You pay the 8th year premium up-front. You get the "money-back" only at the end of the year. So even that, should mean the real investment was Rs. 240,000. But this is a complex problem to solve, so I had to run it through Excel and use an XIRR formula.
You pay in Rs. 30,000 for 8 years, and then, net of money-back and paying premium, you get Rs. 60,000, Rs. 75,000 and Rs. 135,000 in the beginning of the ninth, tenth and eleventh years. (Even for a 10 year policy, the effective term is 11 years since you get paid at the end of the policy).
With a ZERO bonus, the total you make is Rs. 2% a year, compounded. So the bonus is the redeeming piece. But how much bonus?
The answer: About 6% a year of the sum assured, the agent said. Again, I asked for past history – how come they can pay that much, I wondered. There were excuses and more excuses, and the agent vanished. I checked the brochure: it demonstrates that the 6% per year is a dream; the brochure mentions a 20 year policy of 5 lakhs sum assured, for which the best illustration shows a bonus of Rs. 150,000. At best, a 10 year policy might give you just Rs. 70,000 as a bonus.
Even with that, the money you get back after 10 years is a total of Rs. 410,000 and the real Internat rate of return on the policy is a compounded 5.9%.
Quick comparison: Assume you take life cover with a single premium policy for 10 years; a 3 lakh reducing cover will cost you Rs. 4,000 as a on-time charge. Put that away, invest 26K in the first year and 30K in subsequent years; you will make 4.7 lakhs at a 6% rate of return.
Of course there are tax saving advantages but those are likely to go away in the next 10 years (even if you save tax now, you might have to pay on exit).
I would not recommend anyone purchase a money-back policy, and certainly not this one.