Benefit Illustration: How to Find Your Real Return
Every savings policy comes with a benefit illustration, and it holds the one number the sales pitch leaves out. How to read it and compute your actual return.
What is a benefit illustration in life insurance?
A benefit illustration is the customised document every life insurer must give you at the point of sale, under the Master Circular on Life Insurance Products (IRDAI, 12 June 2024), showing year by year what you pay in and what the policy pays back. On a savings or guaranteed plan it is the only honest basis for a decision, because it contains the figures the sales conversation usually reduces to a single headline: the total you would receive at maturity.
That headline is a multiple. What you actually need is a rate.
Why the multiple misleads and the rate does not
Consider a shape common to guaranteed savings plans. You pay ₹1,00,000 a year for 10 years, then wait, and the policy pays ₹22,00,000 at the end of year 20.
Described honestly, that is: you put in ₹10 lakh and got back ₹22 lakh. More than double. It sounds excellent, and it is exactly how such a plan is pitched.
Now compute the rate. Money paid in year 1 was invested for 20 years; money paid in year 10 for only 10. Accounting for when each rupee went in and when it came out, the internal rate of return is 5.1% a year - 5.148%, taking premiums as due at the start of each policy year.
Both statements describe the same contract. One sounds like a strong result and the other tells you what you are being paid for the use of your money over two decades. A multiple hides time. A rate does not, which is why the multiple is the one that gets quoted.
The comparison to make is not against zero. It is against whatever else that money would have done over the same twenty years, at your own tax position. That is your judgement to make, and the illustration is what makes it possible to make it at all.
The three kinds of illustration, and how much to trust each
Not all illustration figures carry the same weight. The distinction is the single most useful thing to understand here.
| Plan type | What the illustration shows | How binding |
|---|---|---|
| Guaranteed, non-participating | Fixed contractual amounts | Fully binding. Every cash flow is committed, so the return is exactly computable |
| Participating (with bonus) | Guaranteed benefits, plus bonus scenarios | Partly. Only the guaranteed column is committed. Bonuses are declared annually and are not promised |
| Unit linked (ULIP) | Fund value at the prescribed 4% and 8% scenarios | Not binding. The scenarios are regulatory benchmarks, and your outcome depends on the funds |
The three buckets are set out in full in our guide to the types of life insurance, and the category-versus-product confusion behind them in life insurance vs term insurance.
On a guaranteed non-participating plan there is no forecasting involved, provided you pay every premium and hold to maturity; the death and surrender paths follow different terms. On that basis every number is a contractual obligation, which means the return is not an estimate, a projection or a matter of opinion. It is arithmetic. Anyone selling you such a plan can tell you the rate, and if they will not, you can compute it from the document they have already handed you.
Where benefits are not guaranteed - ULIPs, and the non-guaranteed columns of participating plans - the projection is shown at two prescribed gross investment returns, 4% and 8%, net of charges. The pair is prescribed so plans can be compared like for like. They are not predictions, and a fund returning 8% gross does not hand you 8%: the charges come out first, which is the point of showing it net.
How to compute the return yourself
You need three things from the illustration: what you pay, when you pay it, and what comes back when.
- List every premium with its year. Year 1 is the first payment, not zero. Note the premium-paying term, which is often shorter than the policy term.
- List every payout with its year. On a money-back plan there are several along the way; on an endowment or guaranteed plan usually one at maturity.
- Use the IRR function in any spreadsheet. One row per year, premiums negative, payouts positive, zeroes in the years where nothing happens.
=IRR(range)returns the annual rate. Mind the offset. IRR treats the first row as time zero, so a premium due at the start of policy year 1 sits in row 1 and a maturity payout at the end of year 20 belongs 20 rows below it, in row 21. Put it in row 20 and the example above returns 5.50% instead of 5.15%, because the money has come back a year early. - Check it against the guaranteed column only. If you compute using bonus figures on a participating plan, you have computed a return on numbers nobody has promised you.
- Include the tax position. Whether maturity proceeds are exempt changes the comparison materially, and the thresholds changed recently - see below.
The whole exercise takes about five minutes and it is the difference between buying a rate you have seen and a multiple you were told.
The tax line that changed, and that changes the arithmetic
Section 10(10D) of the Income Tax Act exempts life insurance proceeds, but the exemption is now capped by premium size, and guaranteed savings plans are precisely the products that run into the cap.
- Traditional, non-linked policies issued on or after 1 April 2023: maturity proceeds are exempt only where the aggregate annual premium across such policies is ₹5 lakh or less.
- ULIPs issued on or after 1 February 2021: the equivalent aggregate threshold is ₹2.5 lakh.
- In both cases the annual premium must also not exceed 10% of the sum assured for the exemption to apply.
- Death benefits remain exempt regardless of premium size.
So a large guaranteed plan sold partly on tax-free maturity may not deliver it. If the proceeds are taxable, the return you computed above is a pre-tax number and the after-tax figure is lower. Confirm which side of the threshold your total premiums fall, counting all such policies together rather than the one in front of you.
Our guide to term insurance tax benefits covers the deduction side, and is your payout taxable covers 10(10D) in more detail.
What to ask for, in the words that work
Sales conversations rarely refuse these; they simply do not volunteer them.
- "Please send the benefit illustration for my age, term and premium." Generic illustrations for a 30-year-old are not yours.
- "Which columns here are guaranteed and which are not?" On a participating plan this single question separates commitment from illustration.
- "What is the IRR on the guaranteed figures?" If the answer is a multiple rather than a percentage, ask again.
- "What happens if I stop paying in year 3?" The illustration usually carries a surrender value column, and early-year values on savings plans are poor by design.
If a plan is good, none of these questions damage it. If the answers are evasive, that is the finding.
FAQs
What is a benefit illustration in insurance?
The insurer's own filed document showing, year by year, the premiums you pay and the benefits the policy would pay back. You receive one at the point of sale. On savings and guaranteed plans it is the only reliable basis for judging the product, because it contains the cash flows the headline maturity figure conceals.
How do I calculate the return on my life insurance policy?
List every premium as a negative amount against its year and every payout as a positive amount against its year, then apply the IRR function in a spreadsheet. On a guaranteed non-participating plan this is exact, because every cash flow is contractual. On a participating plan, compute using the guaranteed column only, since bonuses are not promised.
Why does a policy that doubles my money show only a 5% return?
Because a multiple ignores time. Paying ₹1,00,000 a year for 10 years and receiving ₹22,00,000 at the end of year 20 returns 2.2 times the money paid in, which is 5.1% a year once you account for how long each rupee was invested. The multiple and the rate describe the same contract; only the rate tells you what you were paid for the wait.
What do the 4% and 8% figures in a ULIP illustration mean?
They are gross investment return scenarios that IRDAI requires insurers to show, presented net of charges, so that plans can be compared on the same basis. They are prescribed benchmarks for comparison rather than predictions, and neither is promised. The gap between the gross figure and the net outcome is the charges.
Is the maturity amount in the illustration guaranteed?
Only on a guaranteed non-participating plan. On a participating plan the illustration separates guaranteed benefits from bonus-dependent ones, and bonuses are declared each year rather than committed in advance. On a ULIP nothing in the projection is guaranteed, because the outcome follows the funds you hold.
Is life insurance maturity money always tax free?
No, not since the thresholds were introduced. For non-linked policies issued on or after 1 April 2023, maturity proceeds are exempt under Section 10(10D) only where aggregate annual premiums across such policies are ₹5 lakh or less; for ULIPs issued on or after 1 February 2021 the threshold is ₹2.5 lakh. The premium must also stay within 10% of the sum assured. Death benefits remain exempt in all cases.
Reading the illustration
| What it is | The insurer's own filed year-by-year table of premiums paid against benefits payable. You are given one at sale and it forms part of the sales document set. |
|---|---|
| The number that matters | Not the maturity amount and not the multiple - the annualised return implied by the cash flows, commonly called the IRR. |
| Guaranteed (non-participating) plans | Every figure is contractual, so the return is exact. Compute it once and the plan has no further mystery. |
| Participating plans | Guaranteed benefits plus non-guaranteed bonuses. Only the guaranteed column is a commitment; bonus columns are illustrations. |
| Non-guaranteed benefits | Projected at two prescribed gross investment returns, 4% and 8%, net of charges. Benchmarks for like-for-like comparison, not forecasts. |
| Worked example | ₹1,00,000 a year for 10 years, ₹22,00,000 at the end of year 20. That is 2.2 times the money paid in and an internal rate of return of 5.1% a year (5.148%, premiums at the start of each policy year). |
The example here is illustrative arithmetic on round numbers, not any particular plan. Ask for the benefit illustration for your own age, term and premium, and recompute on those figures before deciding.
Book a call for advice on the best policy for you and your family
A salaried, IRDAI-certified NYVO advisor will look at your cover, flag the gaps that matter, and tell you plainly what to fix. No commission, no pressure.
16+ years in financial services. Former investment banker at Bank of America, Kotak Investment Banking, and SBICaps, and ex-CFO of slice. Founder of NYVO and Principal Officer - IRDAI Certified.
