Insurance is a contract which provides protection against a possible eventuality or risk. So, insurance in its purest form is an expense rather than an investment.
Fortunately or unfortunately, many of us mix life insurance and investment. We expect Returns from our investment in Life Insurance. Traditional Life Insurance Plan is one of the most popular saving options in India.
Why are they so popular? – They are aggressively marketed with so-called ‘guaranteed, fixed return or money-back’ tag by the Insurers/Intermediaries and policy holders want not only insurance cover but also some returns on their investments/savings.
So, what are Traditional or Conventional Life Insurance Plans? – Traditional plans or conventional plans are the oldest types of insurance plans available. Term Insurance plans, Money-back plans, Whole-life Plans, Endowment plans etc., are considered as Conventional plans. Traditional policies are considered as risk-free, as they provide fixed returns in case of death (or) on policy maturity.
In this post, let’s understand – the procedure of Life Insurance Money back Plan Return Calculation using MS Excel. How to calculate rate of return on life insurance policies? What are the different types of bonuses that are generally declared on money-back life insurance policies?..
Life Insurance Money back Plan Return Calculation Calculation using MS Excel
What are Money-back policies? – They provides life coverage during the term of the policy and the maturity benefits are paid in installments by way of Survival Benefits (money-back payments).
You must have bought it (or) planning to buy it primarily to get some cash at hand every five years or periodically based on whatever time period you have chosen. But for all the money you spend as premium payments towards your money back-policy, are you gaining anything? To know that, you can calculate IRR (Internal Rate of Return) of money-back plan and find-out for yourself.
Besides, the survival benefits ie money-back amounts, your policy may also pay you certain bonuses. The rate of return from a money-back life insurance policy is purely dependent on the quantum of bonuses declared by the Insurer and survival benefits.
So, what are Survival Benefits?
For example, let’s take LIC Jeevan Shiromani, a money-back policy. Under this plan below are money-back options;
- For a 14 year Policy : 30% of Sum-assured is payable in 10th & 12th policy year and the remaining 40% is payable in the 14th year as money-back amount to you. So, by the end of policy term, you get 100% of SA as money-back payments / survival benefits.
- If Sum Assured is say Rs 1 Cr, you get Rs 30 lakhs in 10th & 12th policy years and Rs 40 lakhs in 14th year.
- For a 16 year policy : 35% of SA in 12th & 14th year and the remaining 30% is payable in the 16th years
- Under 18 year policy : 40% of SA in 14th & 16th year and the remaining 20% of SA is payable in the 18th year.
- For a 20 year policy : 45% of SA in 16th & 18th year and the remaining 10% of SA is payable in the 20th year.
As discussed, during the money-back policy tenure, your insurer may pay bonuses (if any) as well.
Types of Bonuses in Life Insurance
- Simple Reversionary Bonus (SRB) : This type of bonus is calculated on the sum assured only. This bonus is declared annually and is accrued to be paid out at the time of a claim or maturity. The bonuses are just accrued and compounding does not come into the picture.
- Final Additional Bonus (FAB) : It’s paid to those policies which are of a longer duration and has run for say more than 15 years. This is a one-time payment.
- Loyalty Additions : These are similar to FAB.
- Guaranteed Additions : The Guaranteed Additions are similar to SRB, payable along with the Basic Sum Assured at the time of claim.
You can find about the different types of bonuses that are payable on your Policy in your Policy Bond or Policy Certificate.
The rate of bonus allocated on your policy generally depends upon:
- The Plan and Term of the policy
- Insurer’s Investment experience and the surpluses generated during the year.
- Bonus declared is always based on Sum assured and not on the premium amount.
Popular Endowment Plans
Below are some of the popular Money-back Life Insurance Plans :
- HDFC Life Super Income Plan
- LIC Bima Shree Plan
- LIC Jeevan Shiromani
- SBI Life Smart Income Protect
- LIC Bima Diamond Money back plan
- Bajaj Allianz Cash Assure plan
- Birla Sunlife Bachat Money back plan
- LIC New Children’s Money back plan etc.,
How to calculate Rate of Return on maturity from a Money back Life Insurance Policy?
Let’s now understand the procedure to calculate return on life insurance money-back policy with an example – ‘LIC Jeevan Shiromani‘, using MS Excel’s IRR Function (Internal Rate of Return).
Step – 1 : Kindly note down the basic details of your money-back policy.
- Policy Commencement Date & Policy Maturity Year
- Policy Term (tenure)
- Premium Amount (it can be – yearly, quarterly, monthly)
- Sum Assured
Step – 2 : Check your policy bond and note the type of bonuses that are payable on your money back insurance policy. And then, visit the respective insurer’s portal or contact your Insurance agent and get the previous years’ bonuses data. For example : LIC portal has bonus information.
In our example – LIC Jeevan Shiromani policy offers Guaranteed Additions (accrued yearly) and Loyalty Additions (LA : one time payment) at the end of policy tenure, as maturity benefit.
Guaranteed Additions under Jeevan Shiromani ;
- Guaranteed Addition for first 5 policy years is Rs 50 per Rs 1,000 Sum Assured (SA).
- From 6th Year onwards, GA is Rs 55 per Rs 1,000 SA is payable.
Loyalty Additions under LIC Jeevan Shiromani ;
We can assume Loyalty additions in the range of Rs 200 to Rs 400 per Rs 1,000 Sum assured.
Step – 3 : Get the details of your money-back payment options (survival benefits).
We are considering a 20 year policy. So, 45% of SA in 16th & 18th year and the remaining 10% of SA is payable at the end of the 20th policy year along with accrued Guaranteed Additions + Loyalty additions.
Step – 4 : Now that you have all the required details to do the calculation, key-in your Policy tenure i.e., Commencement Year to Maturity Year and respective Premium payment amounts. Under this plan, premium is payable for 16 years.
- In the first column (policy year), key in the number of years i.e, policy term of 20 years.
- The second column can be termed as ‘Cash flows’. Key-in premium amount in ‘negative sign’ as it is a cash outflow from your pocket. In this example, we are considering a 20 year money-back plan with limited premium payment term of 16 years.
- The 16th policy year has premium payment and one survival benefit of 45% of SA. So, the net amount is positive cash (in) flow.
- The 18th year has one money-back payment of 45% of SA, but premium payment term is completed.
- 17th, 19th and 20th policy years have no cash-flows.
Step – 5 : This is an important step. We calculate the maturity amount by considering sum assured, periodic money-back income (survival benefits) and bonuses. Note that this is a ‘positive cash flow’ and is payable in the next policy year, after the policy matures.
- Maturity Benefit under this plan = Final Survival benefit + Guaranteed Additions + Loyalty Additions.
- Sum Assured in our example is Rs 1 crore.
- Calculation of Survival Benefit = 10% of SA = 10% * 1 Crore = Rs 10 lakh
- Calculation of Guaranteed Additions:
- Guaranteed Additions at the rate of Rs 50 p.a. per Rs 1,000 Sum Assured is payable for the first five policy years. Form 6th year till 20th year, GA @ Rs 55 p.a. per Rs 1,000 SA is payable on maturity of the policy.
- For Rs 1000 SA, GA is Rs 50 for the first 5 years, so for Rs 1 cr it comes to Rs 25 lakh.
- GA is Rs 55 for 5th to 20th year, so for Rs 1 cr it comes to Rs 82.5 lakh.
- Total GA payable is Rs 1.075 cr.
- Calculation of Loyalty Additions :
- Based on the available bonus information, I have assumed Rs 400 per Rs 1000 Sum Assured as one-time LA.
- For Rs 1000 SA, LA is Rs 400, so for Rs 1 cr, the LA for this policy comes to Rs 40 lakh.
- So, the expected maturity amount is = Rs 10 lakh + Rs 1.075 Cr + Rs 40 lakh = Rs 1.575 Cr. This is shown against 21st policy year under ‘Cash flows’ column.
Step – 6 : Go to cash flows column -> after maturity benefit amount -> click on cell and select Function (IRR). Select the data range i.e, the policy tenure including maturity benefit payment year. Press enter and you get the IRR on your money-back policy. The IRR for this example comes or 6.7%.
You may download the excel sheet which has the above calculations.
Now, its time for you to do these calculations for yourself! Take out your life insurance policy bond, collect all the required information and calculate the returns on your investment in Moneyback plan.
I hope you find this post useful and informative. Kindly share your comments, cheers!
Continue reading :
- Life Insurance Endowment Plan Return Calculation | Do-it-yourself guide!
- If Life is unpredictable, INSURANCE can’t be optional
- LIC New Plans list 2018-19 : Features, Review & Snapshot of all the Plans
- Calculate Rate of Return on Investments using XIRR function
- The importance of numeracy in becoming Financially Literate!
- How to calculate the Future Value of investments using MS Excel
- Life insurance : How to get rid off bad insurance?
(Post published on : 01-August-2019)