Bajaj Allianz is heavily promoting its Cash Rich Insurance Plan as a retirement solution through all kinds of media. But does the plan do what it promises?
Cash rich insurance plan is essentially a money-back plan that gives the flexibility to choose the premium paying term as well as the money-back term. The policy can be taken minimum for 10 years and maximum for 65 years.
As shown in the picture below, the policy year can be split into two – Premium Paying Term and Cash Back Period.
You can choose 5, 10, 15, 20, 25 & 30 years, (maximum premium payment ceasing age is 65 years) as premium paying term while 5 to 35 years as Cash Back period.
Bajaj Allianz Cash Rich Insurance Plan – Returns:
Since Bajaj Allianz is pitching the product more like investment than insurance let’s check out the returns.
For this I would take the same example as on its website.
Mr. Sharma buys Bajaj Allianz Cash Rich Insurance Plan at the age of 35 years with Rs. 20 Lacs as sum assured. He opts for Premium Paying Term of 25 years and Cash Back period of 35 years. Seems like a good decision as he accumulates till he retires at the age of 60 and then enjoys the benefit of his benefit till the age of 95 years.
Now let’s see how the investment maths work out for Mr. Sharma and could some alternate investment plan put more money in his hands?
Mr. Sharma has to pay a monthly premium of Rs. 12,036 for 25 years.
At the end of premium paying term, when he turns 60 he would receive Rs. Rs. 27,26,490 (as per the example; this is an assumed figure and vary dramatically based on company’s discretion) in lump sum as an accrued bonus and thereafter every year, till he attains the age of 95 year , he will receive cash back of Rs. 1,22,000 (Cash Back period of 35 years). Out of this Rs. 1,22,000, Rs. 1 lac is guaranteed (5% of sum assured) and Rs. 22,000 is non-guaranteed (its again a assumption and vary dramatically based on company’s discretion).
When Mr. Sharma turns 95 i.e. the end of his cask back period – he gets the sum assured of Rs. 20 lacs + terminal bonus under the plan as a maturity benefit. The terminal bonus again is at company’s’ discretion. For calculation I have assumed terminal bonus as 5% of sum assured i.e. Rs. 1 Lac.
Though the numbers looks attractive at first instance but the IRR (internal rate of return) for the investor will be around 3.5%. This turns out to be much lower than safe investments like PPF which has IRR of 8% or more.
A little calculation the example shows that you might be better off investing in safe instruments like PPF and taking term life insurance than investing in Bajaj Allianz Cash Rich Insurance Plan.
The alternate investment strategy:
Here is an alternate investment strategy for Mr. Sharma. He invests the same amount of Rs. 12,026 monthly for 25 years in a safe investment like PPF or EPF. At the end of 25 years he would get Rs. 1.15 crores. He can easily use a part of it say Rs. 30 Lacs for immediate expenses as in the above case (Rs. 27 Lacs is accrued bonus). The rest (Rs. 85 Lacs) can be put in fixed deposit with interest rate of 8%. He would be getting around Rs. 6.8 Lacs per year as long as he keeps his money in Fixed deposit (as compared to Rs. 1.22 Lacs in the plan above). When he withdraws he gets Rs. 85 Lacs back.
This investment strategy would be much more beneficial, prudent and flexible for retirement planning than the Bajaj Allianz Cash Rich Insurance Plan or any other similar plans from Insurance companies.
Take your pick!