We have consistently advised our family, friends and investors that insurance and investment are best kept separate. Their purposes are fundamentally different: insurance is bought as risk cover for an unforeseen mishap, while investments are made to preserve and enhance wealth. Bundling them together, as several general insurance companies do, reduces transparency, burdens investors with unnecessary hidden fees and denies them the opportunity to earn the returns they deserve.
The ICICI Pru Assured Savings Insurance Plan is a perfect example of why insurance-cum-investment plans tend to give the worst of both worlds. As an example, the policy would work in the following manner: a 32-year old female policyholder pays an Annual Premium*of Rs. 50,000* for a period of 10 years and receives a total amount of* Rs. 6,93,269* at the end of 12 years, if she is alive. Should she pass away during the policy term, her nominee(s) are paid a Death Benefit which is calculated as the highest among the following 3 numbers:
- 10 times the Annual Premium (i.e. Rs. 5,00,000, if the annual premium is Rs. 50,000)
- Guaranteed Maturity Benefit plus Accrued Guaranteed Additions (i.e. Rs. 3,18,269 plus Accrued Guaranteed Additions, in our example)
- Minimum Death Benefit (i.e. 105% of sum of all premiums paid till date)
Based on these conditions, we can see that the Death Benefit varies between a minimum of*Rs. 5,00,000 and a maximum of Rs. 6,93,269*. The following table shows the death benefit depending on the year in which the death occurs:
|Year of Death||Minimum Death Benefit||Annual Premium x 10||Guaranteed Maturity Benefit + Guaranteed Additions||Death Benefit|
- Pays her a lumpsum of Rs. 6,93,269 (equivalent to an annual growth rate of just 4%!), if she is alive at the time of policy maturity 12 years later, and ceases the risk cover immediately
- Pays her nominee(s) between Rs. 5,00,000 and Rs. 6,93,269, if she passes away
The death benefit and the maturity returns are both significantly lower than what any astute policyholder should consider. She can easily get higher returns as well as a much higher death risk cover for the same annual premium if she chooses her insurance and investments separately. She can purchase a Term Life Insurance Policy *(i.e. an insurance policy that charges an annual premium for a death benefit, but with no maturity benefit) with a Death Benefit of Rs. 50 lakhs (7 times the maximum cover provided under the ICICI Pru Assured Savings Investment Plan) for less than Rs 5000, and *invests the remaining amount in a Fixed Deposit. Specifically, the sum of Rs. 50,000 per annum can be split in the following manner:
- Payment for Term Insurance : Rs. 4,678 per annum for 12 years(ICICI Pru Life Insurance)
- Investment in Fixed Deposit : Rs. 45,322 per annum for 10 years (ICICI Bank Fixed Deposit)
To account for the tax-saving benefit of the ICICI Pru Assured Savings Insurance Plan, let’s say she invests in ICICI Bank’s Tax-Saver Fixed Deposit, which gives an annual return of 8.5%. While the principal amount invested in a Fixed Deposit is not taxed, the interest earnings are taxable. Accounting for this fact, she would effectively get a return of 5.95%, assuming she is in the highest Income-Tax bracket of 30%. This is still almost 2% higher than she would get otherwise! *At the end of 12 years, the Fixed Deposit will grow her annual investment of Rs. 45,322 to *Rs. 7,05,779 (Rs. 12,000 more than the insurance-cum-investment plan). And throughout this tenure, she is insured for Rs. 50 lakhs – about 7 times more!
What’s more, if she is comfortable with making investments in mutual funds, then she can potentially earn higher returns, while saving taxes on both her principal amount as well as her earnings. The ICICI Tax Saving Fund has given returns of around 12% over the past 10 years, and at that growth rate, her investment would be worth Rs. 11,06,293 after 12 years. There are several other tax-saving mutual funds in the market that have produced similar or higher gains over the same period.
|Year||ICICI Pru Assured Savings Insurance Plan||Stand-alone Term Insurance + Stand-alone Investment|
|Death Benefit/Maturity Benefit||Insurance Cover||ICICI Bank Tax-Saver Fixed Deposit||ICICI Tax Saving Mutual Fund|
The following graph explains the difference in benefits well:
Put simply, the split shown above gives an insurance risk cover of Rs. 50 lakhs (as opposed to under Rs. 7 lakhs for the ICICI Pru Assured Savings Insurance Plan) and a maturity benefit that is similar (if she invests in a Fixed Deposit) or potentially 60% greater (if she instead invests in the Tax Saving Mutual Fund) compared to the combo plan. If you’re looking for either of insurance or investment (let alone both), clearly the ICICI Pru Assured Savings Insurance Plan is a pretty bad choice.
It is obvious from the above that investing in insurance and investment separately gives a significantly higher risk cover (7 times more, in our example), much better returns (as much as 60% more) and a better exit strategy (leave anytime, with full investment benefits; as opposed to penalties when they are bundled together).
Have you been sold this policy, or a similar policy by a different insurance company? What product features did the salesperson promise you? Did the policy deliver on them? If you’d like us to review your own insurance policy, do let us know in the comments!
To simplify calculations, detailed taxes and cesses have been ignored. The calculations are based on a 12 year policy bought by a 32-year old female with the premium being paid for 10 years.
The ICICI Pru Assured Savings Insurance Plan is an endowment (insurance-cum-investment) policy offered by ICICI Prudential Life Insurance. The brochure can be found here, and the specimen policy document can be found here.
The following is a glossary of terms regarding the policy:
Maturity Benefit: The sum given to the policy holder at maturity, calculated as follows:
Maturity Benefit = (Guaranteed Maturity Benefit) + (Accrued Guaranteed Additions)
The Guaranteed Maturity Benefit on a policy is known beforehand, and is calculated in accordance with a table presented to the policyholder in the brochure. For a healthy 32-year old female, who intends to pay Rs. 50,000 per annum, it works out to Rs. 3,18,269.
Guaranteed Additions: The annual interest on the premiums already paid
Guaranteed Additions = (Guaranteed Addition Rate) x (Sum of Premiums paid to date)
The Guaranteed Addition Rate is also known before hand. For a 12 year policy term, the rate is 10%. Thus, Rs. 5,000 is paid as the Guaranteed Addition in the first year, Rs. 10,000 in the second and so on until Rs. 50,000 in the twelfth year. Note that this implies that the 10% rate is simple interest, not compound interest!
|Policy Year||Premium paid for the year||Total Premium paid till date||Guaranteed Addition||Accrued Guaranteed Additions|
|1||50,000||50,000||10% x 50,000 = 5,000||5,000|
|2||50,000||1,00,000||10% of 1,00,000 = 10,000||15,000|
|9||50,000||4,50,000||10% of 4,50,000 = 45,000||2,25,000|
|10||50,000||5,00,000||10% of 5,00,000 = 50,000||2,75,000|
|11||5,00,000||10% of 5,00,000 = 50,000||3,25,000|
|12||5,00,000||10% of 5,00,000 = 50,000||3,75,000|