Why Longer Policy Terms Yield Greater Returns

Life Insurance policy investments have always been a crucial part of financial planning. Besides creating a financial cushion for the policyholder’s family when they’re not around, these investments also increase savings over the policy period. If you want to enhance the returns from your policies, you must invest in long-term investments, as the power of compounding interest significantly increases earnings. This blog discusses the connection between higher returns and longer policy terms so you can make informed investment choices.

Understanding Policy Terms

A policy term refers to the duration of an insurance policy. It starts with the issuance of a policy and ends with policy maturity. This term is essential as it directly influences the returns you’ll earn on your initial investment. Longer policy terms are more profitable than shorter terms because they let the accumulated money grow over time with compounding interest. For example, if you invest in the Shriram Life Early Cash Plan (UIN:128N093V02) and choose the 20-year policy term instead of the 10-year one, you’ll earn a cash bonus for ten additional years, resulting in higher returns.

The accrued interest will significantly boost your returns since the bonus will be calculated on the sum insured plus the accumulated early cash bonus. Shorter policy terms typically range from 5 to 10 years, whereas longer terms range from 10 to 20 years (even higher in some cases).  

Benefits of Longer Policy Terms

Compounding Interest

Higher return accumulation is one of the biggest insurance policy benefits for plans with longer durations. The returns grow based on the compounding interest principle. Unlike simple interest, compounding interest allows policyholders to earn returns on their initial investment plus the accumulated interest from previous periods. For example, if you invest ₹1,00,000 in a 5-year policy that provides a 5% annual return, then you’ll receive approximately ₹1,27,630.

However, if you invest the same amount in a 20-year policy, you’ll earn ₹2,65,330. You can calculate the same using the formula A = P(1 + R/N) ^ nt, where A is the final maturity amount, P is the principal amount, R is the annual interest rate, nt is the number of years, and N is the number of times interest compound in a year. It will help you understand how your policy term choice impacts the final return amount. 

Higher Maturity Benefits

Long-term investments will always yield higher policy maturity benefits as they give a longer duration for compounding interest to generate considerable results. Some policies, like the Shriram Life Assured Income Plan, (UIN: 128N053V05) provide higher returns for a longer policy duration. The higher the policy term, the higher the returns. Investing in short-term policies can remove or minimise the compounding benefit because the initial investment plus accrued interest isn’t significant enough to generate substantial returns. You have to give it enough time to generate good returns.   

Stability and Security

Whether you invest in a Savings Plan or an Investment Plan, you can enjoy optimal benefits only if you choose longer policy terms. Longer policy duration protects your investment against short-term market fluctuations. Their built-in mechanisms to average out market volatility or temporary economic downturns provide stable growth and financial security.

Lower Premiums

Some people believe that long-term investments lead to higher premium costs. In reality, the scenario is the opposite. Policies with a longer duration attract a reduced per-year premium burden as the initial administrative costs are spread over an extended period. Some policies may even provide premium discounts for longer commitments, but this benefit may not be available on every policy. Check with the insurer to know if they give any discounts. 

Factors to Consider When Choosing Policy Terms

Financial Goals

You should always decide the policy term based on your financial goals and needs. For example, if you’re a young, unmarried individual who wants to focus on building a substantial retirement fund, you can choose retirement plans with longer policy terms, such as 15 years or 20 years.

However, suppose you have kids and you want to accumulate funds to support their higher education expenses or marriage expenses after a few years. In that case, you may stick to child plans with slightly lower policy terms like 5 years or 10 years. Also, consider the financial obligations you may have to fulfil in the upcoming life stages. Factoring in all this information will help you choose the correct policy term aligned with your financial goals.

Risk Tolerance

Most policies with longer terms have strict lock-in guidelines. It means you cannot get your money back before the policy matures or during a specific period. Hence, people should always pick the policy duration based on their risk profile. If you can take the risk of managing your lifestyle expenses without requiring the insurance proceeds during difficult situations, such as job loss, you can opt for longer policy terms. 
On the contrary, if you don’t have enough savings or other reliable income sources to pull yourself through financially challenging situations, you may consider opting for shorter policy terms or policies like the Shriram Life Golden Jubilee Plan (UIN 128L095V01) that allows partial withdrawal after a certain period. Your risk appetite will always be vital in choosing the right policy duration, so consider wisely.

Market Conditions

Market conditions also affect policy maturity benefits, so always evaluate the current and future market conditions to make informed decisions. For example, if the current economic landscape is characterised by potential volatility and fluctuating interest rates, the attractiveness and viability of different policy terms will be impacted.

Insurers may provide lower interest rates during such times, leading to insignificant gains in longer-term policies. It makes short-term policies appear more profitable. We encourage people to carefully analyse how the prevailing market trends, investment performance, inflation, and other economic indicators may impact their longer-term financial planning. It will help people make informed decisions.

Real-Life Examples and Case Studies

Mr. Ramesh, a 35-year-old salaried individual, invested ₹1,00,000/annum in the Shriram Life Assured Income Plan (UIN: 128N053V05) to fund his child’s higher education. He chose the 8-year policy term and 5-year premium payment period. As he paid all his premiums on time and outlived the policy term, he started receiving ₹1,25,000/annum regular income from the 6th year onwards and even received maturity benefit at the end of the 8th year. It helped him pay his son’s higher education fee without any challenges.

However, Ms. Priya received higher returns from choosing the same plan because she chose a higher policy term. She opted for a 15-year policy term and a 10-year premium payment term, while the premium amount was the same at ₹1,00,000/annum. Since Ms. Priya paid timely premiums and outlived the policy term, she started receiving ₹1,75,000/annum from the 11th year onwards and also received the maturity amount on policy term completion.

Conclusion

Individuals looking for easier and more secure ways to grow their investment returns must choose longer-duration policies. The greater duration provides enough opportunities for compounding interest to grow the initial investment plus accrued interest. At Shriram Life Insurance, we provide numerous savings plans in Life Insurance, investment, child, and protection plans with longer policy terms for higher maturity benefits. You can browse and invest in our plans that align with your financial goals.