Life insurance policy features that may be detrimental to investors

Abraham Cherian
Oct 23
6 min read

Updated: Oct 24

Return of Premium (ROP) and money-back life insurance policies in India promise attractive benefits like premium refunds and periodic payouts, but these features often come with significant hidden costs and poor long-term value that undermine both protection and wealth creation goals. These policies typically charge 1.5 to 3 times higher premiums than pure term insurance while returning money without interest, offering fixed payouts that fail to keep pace with inflation, and creating unnecessary financial burdens through extended coverage periods and inflexible advance payment structures that lock capital when families need maximum flexibility.

Premium Return Policies

Premium return policies create a dangerous financial illusion by promising to refund all premiums paid if the policyholder survives the policy term, but this "benefit" comes at an astronomical cost that destroys long-term wealth creation potential. The premiums for these policies are typically twice or thrice those of regular term insurance, yet the returned amount carries no interest whatsoever and fails to account for inflation's erosive effects over decades. moneycontrol+1

The mathematics reveal the true cost of this supposed advantage. For a 30-year-old male non-smoker with ₹1 crore coverage until age 65, while ₹5,57,935 in premiums gets returned as survival benefit, the Net Present Value of that amount equals only ₹2,44,984 when adjusted for inflation—less than half the nominal value. This means policyholders effectively lose money even when receiving their "full refund," making premium return policies one of the most expensive ways to obtain life insurance protection in India. moneycontrol

The opportunity cost becomes staggering when considering alternative strategies. The excess premiums paid for premium return features could instead be invested in mutual funds, fixed deposits, or other instruments that generate actual returns over the policy period. A disciplined investor following a "buy term and invest the difference" approach typically accumulates significantly more wealth than someone locked into these inflexible premium return structures that offer zero growth on the returned capital. acko+1

Insurance companies market these policies by exploiting the psychological aversion to "wasted" premiums, but pure term insurance isn't wasteful—it's precisely fulfilling its purpose of providing affordable protection during earning years when families are most vulnerable. Premium return policies essentially force policyholders to give the insurance company an interest-free loan for decades, making them among the most financially detrimental products available in India's life insurance market. acko

Money Back Policies

Money-back policies represent one of the most financially destructive products in India's life insurance market, disguising poor investment performance behind the appealing promise of regular cash payouts during the policy term. These policies fundamentally compromise both adequate life cover and wealth creation by diverting premium portions toward survival benefits that offer minimal returns.

The structural flaws in money-back policies create multiple financial disadvantages:

Inadequate Coverage Per Premium: Higher costs force policyholders to accept lower sum assured amounts compared to pure term insurance, leaving families underprotected when they need maximum coverage. moneycontrol+1
Poor Investment Returns: The survival benefits typically yield returns well below inflation rates, with fixed payouts losing significant purchasing power over 20-30 year policy periods. indiafirstlife
Inflexibility and High Opportunity Cost: Funds locked into these policies miss participation in equity markets or other investment opportunities that could generate substantially higher returns over the same timeframe. acko+1
Limited Coverage Adequacy: The periodic payouts may not meet actual financial needs during emergencies, while the insurance component remains insufficient for comprehensive family protection. moneycontrol+1
Erosion by Inflation: Fixed survival benefits fail to keep pace with rising costs, meaning the real value of periodic payouts diminishes significantly over the policy duration. youtube indiafirstlife

The tax implications add another layer of concern, as survival benefits may be taxable under the Income Tax Act 1961, reducing the already modest returns further. Insurance experts consistently recommend separating insurance and investment needs through pure term policies combined with dedicated investment vehicles like mutual funds, which historically deliver superior long-term wealth creation compared to the hybrid structure of money-back policies. acko+2

ULIPs Expensive Investment Traps

Unit Linked Insurance Plans (ULIPs) present significant structural disadvantages that make them unsuitable for most Indian investors seeking optimal protection and wealth creation. These hybrid products attempt to combine life insurance with market-linked investments but deliver inferior results in both functions compared to dedicated alternatives. groww

The cost structure reveals the fundamental problem with ULIPs. Multiple charges including fund management fees, mortality charges, policy administration costs, and switching fees substantially erode investment returns over time. These cumulative expenses often consume 15-30% of premium payments in initial years, creating a significant drag on wealth accumulation that pure mutual fund investments avoid entirely. cleartax

Tax Efficiency Limitations Create Additional Burdens

Recent regulatory changes have further diminished ULIP attractiveness. Since February 2021, ULIPs with annual premiums exceeding ₹2.5 lakh face capital gains taxation on maturity proceeds, eliminating their previous tax-free status. This change aligns ULIP taxation with mutual funds while maintaining higher cost structures, creating a worst-of-both-worlds scenario for investors. Even policies with lower premiums face the 10% sum assured limitation under Section 80C, restricting tax deduction benefits. hdfclife+3

Inadequate Insurance Coverage Per Premium

The dual nature of ULIPs forces a compromise that typically provides insufficient life cover relative to premium outlay. For families needing substantial protection during earning years, ULIP premiums that could secure ₹50 lakh term insurance coverage might only provide ₹15-20 lakh in sum assured due to investment allocation requirements. This coverage inadequacy becomes particularly problematic during peak financial responsibility years when maximum protection is essential. bandhanlife

Lock-in Periods and Liquidity Constraints

The mandatory five-year lock-in period creates dangerous inflexibility during financial emergencies. Unlike pure term insurance with annual renewability or mutual funds with daily liquidity, ULIPs trap capital when families might desperately need access to funds. Even after the lock-in period, partial withdrawal facilities come with restrictions and potential charges that further complicate financial planning during genuine emergencies. groww

The investment performance typically disappoints due to conservative fund management and high expense ratios. While marketing materials highlight equity participation potential, the reality involves substantially lower returns compared to direct mutual fund investments over equivalent periods. The switching facility between funds, often marketed as a benefit, incurs additional costs and complexity without delivering meaningful performance improvements for most investors. bandhanlife

Coverage Till Age 80

Extended coverage periods up to age 80 or beyond create unnecessary financial burdens without proportional benefits for most Indian families. By retirement age, the primary purpose of life insurance—replacing lost income and supporting financial dependents—typically becomes irrelevant as children achieve self-sufficiency and accumulated assets provide adequate security. The premiums for such extended coverage rise substantially in later years, often creating financial strain during retirement when income is fixed and limited. moneycontrol

The mathematical reality proves even more concerning when factoring in inflation's impact over decades. A ₹1 crore payout at age 80 will have significantly reduced purchasing power compared to the same amount received at age 60, while the total premiums paid over the extended period may actually exceed the coverage amount received. Most financial experts recommend focusing insurance coverage during productive earning years (25-60) and redirecting funds that would go toward extended premium payments into dedicated retirement planning investments instead. acko

Advance Premium Payment

Large upfront payments covering multiple years of premiums create significant liquidity challenges and financial inflexibility for policyholders. These advance payment structures lock substantial capital when families need maximum cash flow flexibility, particularly during India's economic volatility where job security and income stability remain uncertain. If circumstances change due to unemployment, medical emergencies, or other financial pressures, surrendering policies with advance premium payments typically results in heavy penalties or complete loss of the prepaid amounts, providing no safety net when it's most needed. moneycontrol

The opportunity cost compounds over time as blocked funds miss participation in India's growing equity markets and other investment opportunities. Instead of committing ₹2-5 lakhs upfront for insurance coverage, maintaining annual premium payments allows the surplus to be invested in mutual funds, fixed deposits, or other instruments that can generate returns while preserving liquidity for genuine emergencies or better investment opportunities that may arise during the policy term.