How to understand and read benefit illustration before buying a life insurance policy
In a benefit illustration, gross yield is calculated as a percentage (8 percent and 4 percent) based on the portion of premium invested on a year-on-year basis and the net yield is calculated as a certain percentage on the maturity amount.
You must know that it is the investable portion of the premium that earns the return and not the total premium which you pay. So, when you pay premium for an insurance policy, several charges are deducted towards mortality, GST, fund management charges (FMC) if any, etc., and only the balance premium gets invested.
The benefit illustration basically shows how returns on the money invested will be earned/calculated.
The projected investment rate of return shown in the benefit illustration can be guaranteed as well as non-guaranteed. Therefore, you should read it carefully.
1. How to understand whether the rates of return(s) are guaranteed or non-guaranteed
A guaranteed rate of return on your investment means that the investment will grow as shown and the insured will receive the invested amount as stated in the benefit illustration. Also, if the life insurance policy offers guaranteed benefits, then it is clearly marked as 'guaranteed' in the benefit illustration table.
On the other hand, the non-guaranteed projected rate of return on your investment is dependent on the performances of the investments, therefore, the rate is assumed in the policy benefit illustration.
Rakesh Goyal, Director, Probus Insurance brokers said, "Usually, a policy benefit illustration will show guaranteed and non-guaranteed returns. The death benefits and other guaranteed returns, as mentioned, are real. Whereas, the non-guaranteed returns are variable as they are a reflection of the projected investment rate of return based on the assumption of 4 percent per annum and 8 percent per annum on investment."
Also read: IRDAI issues new norms to curb life insurance misselling, makes illustrations mandatory
The regulator has standardised the projected rates of return on the invested amount which are to be taken in the benefit illustration to show projected investment growth throughout the term of the policy. These assumed rate of return (gross yield) show how the fund grows after deducting all the charges.
C S Sudheer, Founder & CEO, IndianMoney.com said, "You must remember that the published gross yield to project investment growth in the benefit illustration is not a true reflection of the rate of return as it excludes mortality cost, Good and Services Tax (GST) and costs for offering a guarantee if any."
What you must know
a) In a benefit illustration, gross yield is calculated as a percentage (8 percent and 4 percent) based on the portion of premium invested on a year-on-year basis and the net yield is calculated as a certain percentage on the maturity amount.
As per the regulator, for insurance policies with term above 10 years, the net reduction in yield should not be more than 2.25 percent at maturity. And for insurance policies with term less than or equal to 10 years, the net reduction in yield should not be more than 3 percent at maturity.
For instance, if you take a policy for a term of more than 10 years, the post-cost return on the maturity will be at least 5.75 percent at an 8 percent per annum gross return/yield.
Also, the net reduction in yield does not factor in/take into account the mortality charges, which can eat into your investments at higher ages and sum assured, taxes and costs of guarantees, if any.
Therefore, in reality, the post-cost return on the investible portion of the premium paid will be calculated on the basis of net yield. So, when you read the benefit illustration make sure you know how much net yield has been calculated on your invested amount. The calculation of net yield is mentioned in the policy benefit illustration table.
Since the net yield is derived from gross yield in the policy benefit illustration, it is also not real. However, it will give you a fair idea of how much net return you will earn on the gross return actually earned on the investible portion of the premium paid.
This is how net yield calculation in a policy benefit illustration table is shown
|| Projected investment rate of return (percentage)
| Gross Yield
|| 8 (non-guaranteed return)
| Net Reduction in Yield (This excludes reduction due to GST, mortality charges, morbidity charges, rider charges and guaranteed benefit charges, if any)
| Net Yield (This excludes reduction due to GST, mortality charges, morbidity charges, rider charges and guaranteed benefit charges if any) *
| Net Yield (This includes GST at 18% and all charges) *
Sudheer said, "In the case of assuming return at 8 percent per annum, if the policy illustration shows net yield as around 6.5 percent, then the impact of charges is 1.5 percent. This means that charges have eaten into gross returns lowering the net yield. Higher the charges, lower will be the net yield."
b) The insurance sales agent cannot assume any rate of return on their own to show you exaggerated investment projection at the time of selling an insurance policy.
Make sure that they are showing you the standard benefit illustration prepared by Irdai mandated actuaries (professionals dealing with the measurement and management of risk and uncertainty involved in the policy) of the insurance company.
Also read: Why it is important to understand the benefit illustration when buying life insurance?
2. How to read insurance policy benefit illustration
All life insurance benefit illustrations broadly show details of an insured person, life insurance product features (such as policy term, the sum assured, premiums to be paid - policy term, mode of payment, etc.), investment options and policy riders, if any, on the top of the benefit illustration guide. If you opt for a unit-linked insurance plan (ULIPs), the benefit illustration clearly states: "The investment risk in the investment portfolio in the policy is borne by the policyholder."
Here is a sample of a life insurance benefit illustration
XYZ Savings insurance plan
Date of Illustration - 21/10/2019
| Personal Details
|| Product Features
|| Investment Options
| Name of the life insured
|| Policy term
|| 15 Years
|| Secure fund
| Age of life insured at the inception of the policy
|| 28 Years
|| Premium paying term
|| 15 Years
|| Balanced fund
| Gender of the life insured
|| Premium payment mode
|| Growth super fund
| Name of policyholder
|| Modal premium
|| Rs 3,000
|| Growth fund
| Age of policyholder at the inception of the policy
|| 28 Years
|| Annualised premium
|| Rs 36,000
|| High growth fund
| Gender of policyholder
|| Sum assured of the base policy
|| Rs 3,60,000
|| Dynamic fund allocation
| Policyholder residential state
|| New Delhi
|| Life cover multiple
|| 10 time of Sum assured
|| Death benefit option
|| As applicable
Further, the benefit illustration clearly shows how the total premium paid per year is directed/used towards investment, charges and GST of the life insurance plan each year separately in different columns. This way you will know how much amount is invested, paid for charges and left (fund value/wealth creation) at the end of the year.
Also read: 5 important points to remember while reading policy benefit illustration
The following table provides year-by-year statements of various charges and benefits over the duration of the policy with the assumed rate of return as mentioned:
*FMC means Fund Management Charges
The benefit illustration also has a column which shows the surrender value if you choose to opt-out at different time periods. Goyal said, "Surrender value is an important number. Generally, surrender costs are expensive in most life insurance policies, and one should avoid surrendering the policy." The death benefit is clearly calculated/mentioned in a separate column.
The Part 1 and Part 2 of Scenario 1 is only an illustrative document. The benefits if guaranteed, are clearly marked so. For variable benefits, the assumed investment growth rate of 8 percent is used only as an illustration.
Similar to the above table there will be another table in the benefit illustration which will provide investment projections with rate of return assumed at 4 percent per annum.
Also read: Should you opt for ULIP with minimum sum assured?
This way, the benefit illustration of life insurance plans shows how the investable portion of your premium paid grows during the policy period. You also get an idea of how the charges are applied at various stages during the policy term.
It is basically a year-by-year summary of the costs and benefits of the life insurance plan. Thus, you can assess the impact of the cost of the life insurance plan on your corpus each year and hence, you can make an informed decision on increasing/decreasing premiums and sum assured to meet specific financial goals.