Pay insurance premium smartly and save extra money

Paying the insurance premium annually under this strategy will provide Rs 1 lakh extra by the time your policy matures.

The moment one gets settled into life or gets married, the first thing that comes to mind is savings and the most common way of savings for every starter is life insurance as it gives a return as well as insure the life also.

Introduction

A life insurance policy is a very common part of every investor's portfolio. These policies are known to give a moderate return due to life cover attached with it. Policies are taken basically to cover the risks attached to the life of the insured.

In case of any casualty, this policy insures the future of the insured person's dependents. However, compared to other investment instruments, one would get least return from a life insurance policy. If one is concerned about safety, security and investment gain, then life insurance is undoubtedly the best instrument for all investors.

NEXT: How to save extra

Amit Sethi is an MBA (Fin) graduate. He has spent eight years in equity research and stock broking. He can be reached at amvilube@gmail.com

How to save extra?

It has been seen that the premiums of life insurance are not paid regularly by many investors, resulting in policy lapses or surrenders in such a situation. As per Insurance Regulatory Development Authority records, almost 10 to 15 per cent of life insurance policies taken during the year lapses or surrenders due to non-timely payment. The reason is a heavy premium to be paid annually.

This problem can easily be handled by paying premium in a smart way. One can deposit the amount equivalent to the amount of monthly premiums in a bank recurring deposit (RD) for one year. After the maturity, one can withdraw the amount and pay the premium annually. Using this strategy, an investor can save some extra money by interest received in recurring deposits.

The amount of insurance premiums paid monthly or quarterly is always greater than the annual payment. The RD gives the interest return at the rate of fixed deposit (FD), hence before paying the annual premium, an extra interest can be earned on the same. This can be illustrated with an example.

NEXT: An illustration on how you can save extra

Illustration

Suppose an investor, aged 28 has taken a life insurance policy for 21 years that comes with a sum assured of Rs 6 lakh. The amount of premiums he has to pay quarterly is Rs 8,048 and the amount he has to pay annually is Rs 31,224. This means he has to pay Rs (8,048X4) 32,198 less Rs 31,224 = Rs 974 more.

If he pays Rs 2,520 monthly in a recurring deposit of a bank, he would get the maturity of around Rs 31,240 which is equal to his annual premium. In the RD, he has to pay Rs 30,240 to get the maturity of Rs 31,240 (taking interest @6 per cent per annum). Here, he would earn Rs 1,000. So, by paying the premium under this model an investor may save Rs 1,000 + Rs 974 = Rs 1,974 extra which is 6.3 per cent of the amount of premium.

The past bonus rates declared by LIC of India under its different plans is around 4 to 5 per cent. This means one can save more through this investment strategy if he chooses to pay his premium annually through RD. If we take the rate of return at 5 per cent per annum, then a policy of Rs 6 lakh for 21 years will give around Rs 12 lakh on maturity.

However, paying the premium annually under our RD strategy will provide Rs 1 lakh extra at the end of the maturity if the saved amount is fixed deposited @8 per cent per annum regularly every year.

So, one should think over it and save extra money out of his insurance investments. This type of premium paying habits keeps one out of the pressure at year ends, and he can smoothly save the amounts on a monthly basis without any worries.

This is an example only in the case of life insurance policies. One can easily use the same pattern in his other saving plans also where the investor has to pay the amount annually. These small differences can collectively make a huge difference to our saving plans. A difference of even one rupee can change the opinion of an investor while comparing different investment plans.

Normally, one would bargain for a smaller amount without going through the quality and return of a plan then why shouldn't he customise his plans in such a way that he can get the best return out of it.

Conclusion

Amount of premium: Check whether the amount of premiums to be paid is within your limits. This will minimise the chances of policy lapse due to non-payment of premium.

Duration of policy: Duration for which the policy has to be taken should be looked at. This depends on your future requirements, e.g. children's education, marriage, etc.

Frequency of premium: The interval in which you want to pay your premium should be decided properly i.e. whether it should be monthly, quarterly or annually.

Type of plan: The future needs can help investors decide the plan which he should opt to fulfill those needs. This should be chosen with own discretion and not on the suggestion of others.

Thus, one can earn the best return from his investments if he pays little attention at the initial stages of investment.