Bharti-AXA life insurance has just launched a new traditional savings plan – Secure Savings. The company has highlighted its main feature as "Guaranteed upto 10% return". Let's do some simple maths calculations to see the truth of this figure.
Firstly, let us extract the wordings of "Guaranteed" feature from the official brochure of this plan.
The Guaranteed Additions are calculated as a percentage of each year’s cumulative base annual premium paid and are paid out on maturity or on death of the life insured. This percentage varies with premium bands and Policy terms.
If you choose a policy term of 20 years and an annual premium of Rs.20,000, then the guaranteed addition percentage will be 10% (as given in table above) and the guaranteed additions will be calculated as follows :
Guaranteed Additions at Maturity = 10%* (20,000 + 40,000 + 60,000+ ….. + 4,00,000) = Rs. 4,20,000
Sounds Good. Isn't it?
Let us take a case study – again from its official brochure.
Saurabh purchases Bharti AXA Life Secure Savings Plan and invests Rs.20,000 as annual premium. He chooses a policy term of 20 years. Assuming that Saurabh is in good health, his sum assured as per his age is Rs.2,35,073
The company shows this final maturity benefit amount of Rs.6,55,073 as a result of 10% of each year's cumulative base premium.
As a common man investor, do you really understand "each year's cumulative base premium" phrase.
And if you know, it doesn't make big difference.
The common man investor simply wants to know how much return will I get?
And the simple answer is – calculate in Excel file using IRR formula.
I'm taking the above figures in Excel as follows:
To calculate IRR, simple put the premium you're paying on regular interval as "-" (minus) value. Write down the maturity value at the end and use IRR function of Excel. I'll use another space to explain this function in more detail with online IRR calculator.
Coming back to Secure Savings plan, the IRR is just 4.49%.
Hey! where is my 10% return? Don't worry, it's still in brochure, but not in your account.
It's not new and amazing that life insurance companies are presenting their plans in attractive ways to get business. Now, is the turn of investors to open eyes and mind.
Many companies are offering cheap online term insurance now-a-days. Even Bharti-AXA also has attractive online term insurance plan. One should go for them to risk cover.
As far as safe returns are concerned, some banks are offering 7% p.a. on savings account, PPF is offering 8.8% and bank FD is offering more than 9%.
Why to go for 4.49% return then?
Got any doubts or query. Mention in the comments below.